atural Gas Market Report By Dominick Chirihella
- Fri 09 Dec 2011 08:35:54 CT
Related Keywords: Energy
NG futures close to making new year to date lows
Nat Gas did was it seems to mostly do of late...decline in value. The combination of market participants digesting yesterday's inventory report which resulted in the surplus versus both last year and the five year average for the same week widening while the short term weather forecast is remaining bearish was enough to send prices in the futures markets down by over 3% (as of this writing). The spot Nymex Nat Gas futures price is now within shouting distance of hitting and likely setting a new year to date low price ($3.285/mmbtu) in the foreseeable future.
On a somewhat positive note today's Baker Hughes rig count declined by 36 rigs that were deployed to Nat Gas drilling or a 23 month low. Horizontal rigs which are generally used in Nat Gas shale drilling declined by 5 rigs. On the other hand rigs deployed to the oil sector hit another record high increasing by 29 rigs. I said this was somewhat positive for Nat Gas in that at some point in time ( I am not sure when) the fact that rigs deployed to the Nat Gas sector have been steadily declining for months will eventually result in a reduction in production. This is something to watch down the road.
In the meantime all one needs to watch is the daily short tem weather forecasts which are suggesting that winter is not likely to arrive across a major portion of the US until the end of this month or possibly not until January at the earliest. The unseasonable weather is having a positive impact on the consumer in that their heating fuel bill should be lower than normal but certainly it is having a negative impact on the producers and utility gas suppliers. The warmer than normal weather is also resulting in the current surplus in inventory continuing to grow. The very early estimates I am seeing for next week's inventory report are around a net withdrawal of 85 to 95 BCF.
Sounds like a decent withdrawal until one compares it to last year which had net withdrawal of 154 BCF and the five year average withdrawal for the same week was 142 BCF. If the actual data is in the range of early estimates the current surplus is going to widen by about 60 BCF versus last year and about 50 BCF versus the five year average. With the surplus continuing to grow Nat Gas prices are going to have a lot of difficulty in moving off of their current low levels. The growing surplus is also reflected in the winter intermonth or calendar spreads that should be in a backwardation this time of the year rather they are in a contango that is continuing to widen ...another bearish indicator.
The EU Summit is over with some more baby steps in moving forward with the Merkel Sarkozy proposal mostly accepted. Twenty three of the twenty seven EU members approved the deal. Lots of details still to be put together and will likely take until the next EU Summit meeting in March. Overall it is another kicking of the can down the road a bit and with lots of details yet to be worked out resulting in the potential for a lot more volatility as the situation progresses likely to be the norm. The European situation has not been put to bed yet. At the moment the markets are cautiously positive based on the way most risk asset markets are trading. That said in pre-US opening equity futures have only recovered about half of yesterday's losses so far with key technical resistance levels yet to be tested.
The EU deal will play out through today's US trading session and beyond as many of the usual suspects voice their opinions over the media airwaves. Bottom line... in my opinion... will Europe be dissolving anytime soon and/or is Europe heading into a deep recession that will spread around the globe anytime soon? I do not think so. I think the EU and the ECB (lowering rates) may have done enough to slow the problem down enough to allow the European economy to slowly begin to grow. That said I am not sure my view will be the primary view that will be in the markets today or the near future as many participants remain extremely skeptical about a soft landing for Europe. Time will tell but in the meantime extreme caution should be used when trading or investing in any of the risk asset markets. Use stops and keep your investments and trading positions at smaller than normal levels until there is a lot more clarity. Unfortunately that clarity is not going to come unit at least the first quarter of next year. Expect high levels of volatility, many intraday and day to day price reversals and a seemingly infinite amount of 30 second news snippets around Europe for the foreseeable future.
Moving to Asia China's inflation data came in below the market estimates (4.2% versus expected at 4.4%) and below October's 5.5% level. This is a good news, bad news data point. Good news... with China's inflation slowing the government is likely to continue to ease monetary policy further. Recall they started last month in lowering the bank capital reserve requirements by 50 basis points. Expect more and watch for a cut in interest rates in the near future. The bad news part of the number is a slowing inflation number suggests that the tight monetary policy employed by the government for the last year or more has worked and the Chinese economy is slowing. The Chinese economy is one of the main growth engines of the global economy and now we will have to see if the government is going to be able to revive the economy and pump up the growth rate now that inflation is not an issues.
Finally in the US the macroeconomic data continues to outperform. Yesterday the weekly initial jobless claims dropped much more than the expectations. The US economy is growing slowly even as Europe is still a mess and Asia has been slowing down. Good news for the equity markets not much of an impact on the oil markets as demand growth is almost negligible in the US versus places like China.
I am maintaining my neutral view a cautiously bearish bias The surplus that is building in inventory versus both last year and the five year average is going to get harder and harder to work off until it gets cold over a major portion of the US and as such for the medium term I am still very skeptical as to whether NG will be able to muster any kind of strong upside rally absent some very cold weather for an extended period of time.