Eurozone consumer confidence is weak and more than likely will get weaker. U.S. bonds are starting to run as investors start to look to the U.S. as a safe haven play. That mood may play into the oil momentum for a while, if we see increased panic the rally could fail. Technically oil looks poised to test near $97 a barrel, which should be close to the upper end of our range as the weakening euro should help provide overhead resistance.
What also seems to be providing some overhead resistance is last night’s American Petroleum Institute Report. We saw crude supply increase by 3.7 million barrels. The build, along with euro woes, seemed to slow the U.S. durable goods and home price inspired rally. The other issue that may hurt momentum is the fact that the API reported an increase in crude supply in Cushing, Okla. The drawdown in Cushing supply is one reason that we have seen the WTI gain on the Brent crude. The thinking is that as the Seaway Pipeline and oil by rail gets the oil out of Cushing and to the refiners, the glut will ease and prices will get more in line with the Brent price. It is also the reason that as reported by Bloomberg News that “Light Louisiana Sweet” and other Gulf Coast crudes traded at the tightest spread in almost two years. Light Louisiana versus WTI fell by $4.50, the biggest on day drop since November 20th.
The API also showed a drop in Gasoline stocks after the RBOB market showed its first signs of bullish life in weeks. Position traders on my trade levels who rode the short side should cover if only for seasonal considerations. It was a nice slide but all good trades must come to an end.
But it is possible that the Natural gas trade is just getting started. Cold temperatures helped whip this market 14% higher this month, and despite the fact that we failed to close above $4 we still posted the highest close since Sept. 14, 2011. Commodity funds have been active as the demand for gas is rising at an incredible pace. Rig counts while jumping last week have been trending lower as one of the best kept secrets in trading may be starting to emerge. Of course the forecast for the next 10 to 15 days is helping as it seems that winter will never end!
Yet the commodity funds continue to look beyond winter putting on bullish option strategies. One that seemed prevalent in recent days has been the "fence” where the funds buy out-of-the-money calls and sell a put on the other side to pay for the call. Risky if you get a big break but sweet if the market rallies. Demand is rising as the United States now generates 40% of its electricity from natural gas, up from 20% just a few years ago. That number could go as high as 80% in the next decade. Power generators that will be forced to shut down old coal plant will switch to natural gas.
One plant as reported by the Buffalo News says "A $506 million project to convert the coal-fired power plant in Dunkirk to less-expensive natural gas could reduce wholesale electricity prices in Western New York by as much as 5% while also reducing harmful greenhouse gas emissions, according to a report released Tuesday by the plant's owner. The report, from a Boston-based energy consultant and commissioned by NRG Energy, found that converting the Dunkirk plant to natural gas – as opposed to shutting it down – would reduce the need for electricity from other more costly, higher polluting power plants and eliminate the need to build long-distance transmission lines to import power into the state, such as a proposed $2.2 billion project to bring electricity from Quebec to the New York City area.”
The Washington Post is reporting that "Martin Durbin, executive vice president and chief lobbyist for the American Petroleum Institute, will become head of the American Natural Ga. Alliance on May 1, according to an industry source and a note that went to ANGA members.” The Post says that Durbin moves over at an important time for the group, which represents 27 large independent natural gas exploration and production companies who are actively drilling in shale gas areas. The group supports natural gas exports and increased use of natural gas in power generation and says that gas supplies are adequate to meet higher demand.
Durbin, who is the brother of Senate Majority Whip Dick Durbin (D-Ill.), has long worked under API President Jack Gerard, at API since 2009 and earlier at the American Chemistry Council, whose members use natural gas as a feedstock. One of Durbin's tasks at ANGA will be to try to defuse opposition to exports among industrial natural gas users who worry that exports could cause higher gas prices.