Heading into this morning’s EIA weekly Nat Gas report the futures market is hovering around the trading range lower support level and barely remaining above it. In yesterday’s newsletter I indicated that the market was setting up for a test of the range support level of $4.16/mmbtu and so far in light overnight trading the first pass at that test has already occurred with prices holding support so far. However, there is a lot of trading time left to the day with Europe trading just getting underway and the US yet to get started. In addition today the EIA inventory report will likely play a role in whether or not the range support is still in play or not by the end of the US trading session.
From a technical perspective the spot futures contract is showing all of the signs that prices may move lower in the short term. In addition to today’s inventory report likely being a price movement catalyst the May Nat Gas futures contract expires tomorrow and as such we could see some rolling of positions to the forward month thus resulting in selling pressure on the expiring May contract. Overall the technicals are neutral at best and will likely turn bearish if support is solidly breached today.
The latest six-to-ten day and eight-to-fourteen day forecasts continue to support the view that neither heating nor cooling demand will surge anytime soon. The six-to-ten day forecast is projecting mostly normal spring like temperatures across a major portion of the U.S. with only small pockets of above normal and below normal temperatures. The longer term forecast shows a larger area over the southern part of the country expecting below normal temperatures suggesting that there will not be an early start to the summer cooling season. Through the first week of May we will not be seeing an early surge in cooling related Nat Gas demand like what occurred last year.
This week the EIA will release its inventory on its normal schedule and time: Thursday, April 25 at 10:30 AM (ET). This week I am projecting the second injection of the season of 40 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest level of above normal temperatures during the report period. My projection compares to last year's net injection of 44 BCF and the normal five-year net injection for the same week of 50 BCF. Bottom line: The inventory deficit will widen this week versus last year as well as the deficit compared to the five-year average if the actual numbers are in sync with my projections. This week's net injection will be supportive when compared to the historical data.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 797 BCF. The deficit versus the five year average for the same week will come in around 84 BCF. The early market consensus is projecting the second injection of the season in the range of 20 BCF to 50 BCF with the Reuters market consensus at 32 BCF.
The divergence between oil and US equity prices narrowed somewhat yesterday as oil prices rose strongly after a larger than expected draw in US gasoline stocks while equities in the US declined. The values of both of these instruments still need further correcting to return to a more normal interrelationship as either oil is still undervalued versus equities or US equities are overvalued versus oil prices. I am not sure yesterday’s strong move to the upside across the entire oil complex was the result of a surge of new long side entries into the market rather I view much of yesterday’s gains as driven by a modest short covering rally prompted by the overall bullish EIA weekly oil inventory snapshot and a view that more easy monetary policies are forthcoming.
Further supporting oil and other risk asset markets were the growing view that with the European economy not improving the market expects the ECB to lower short term interest rates when it meets next month. This pushed the US dollar lower versus most major currencies which is a bullish catalyst for oil prices. In general the market has seen the result of the easy monetary policies on equity markets in many of the advanced economy bourses (as discussed in detail in yesterday’s newsletter) and with most of those economies still slowing the market is expecting even more stimulus and easy money policies going forward.
With the exception of the U.S. Dow all of the other bourses in the EMI Index rose over the last twenty four hours. The Index is currently 2.25% higher for the week resulting in the year-to-date value for the Index now sitting at unchanged. Japan and the U.S. remain the two high fliers in the Index as both of these economies are in the midst of a very easy monetary policy and one that is printing money to drive short and long term interest rates lower. Four of the 10 bourses still are in negative territory but all for have gained back some of their lost value. Brazil’s year-to-date loss has now dropped into single digits. Overall the global equity markets (except the U.S.) were a positive price driver for the oil complex over the last twenty four hours.
I am upgrading my view of the entire complex to a neutral bias as inventories after yesterday’s short covering rally that could extend further. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range resistance levels suggesting further upside potential in the short term.
Markets are mostly higher at the start of the European trading session as shown in the following table.