Natural Gas: Cold Weather Continues to Support Prices

Note: Monday's Report is Being Published on Sunday Due to My Schedule in Asia for Monday

Quote of the Day
The more I want to get something done, the less I call it work.
Richard Bach

Nat Gas moved higher throughout most of the week in a modest round of short covering and some new buying on a combination of bullish short term weather forecasts and a technical breakout about the upper range resistance point of $4.30/mmbtu. The spot April Nymex Nat Gas contract has now breached the $4.30/mmbtu resistance level with the new resistance level now around the $4.60/mmbtu. After Thursday's neutral EIA inventory report some of the shorts who got back into the market were squeezed out on Friday as the spot April Nymex Nat Gas contract approaches this week's expiration. The combination of inventories at least moving in the right direction and yet another colder than normal weather forecast were enough to send the weak shorts to the sidelines. However, the vast majority of the current support for prices is the latest six to ten day and eight to fourteen day weather outlooks. The forecasts are still calling for below normal temperatures covering the eastern two thirds of the USA through at least the first third of April. The colder than normal temperatures in April are certainly not as consequential as a similar forecast in January. However, the current weather pattern is likely to result in modest net withdrawals from inventory for several more weeks (or more) prolonging the start the normal inventory injection season and the lower demand shoulder season. On the week Nat Gas increased by 5.64% or $0.235/mmbtu adding to the previous week's modest gains.

This week the EIA will release the weekly Nat Gas inventory injection on its regularly scheduled day and time...Thursday, March 31rd. This week I am projecting a net withdrawal of 24 BCF versus a modest injection last year's but around the same net withdrawal for the five year average for the same week. My withdrawal forecast is based on the fact that heating related demand likely increased a bit last week as colder than normal temperatures engulfed a good portion of the US. My projected withdrawal will be more than last year's net injection level of 12 BCF but around the same level as the more normal five year average net withdrawal for the same week of 22 BCF.

If the actual EIA data is in line with my projections the year over year deficit will widen to 42 BCF. However, the surplus versus the five year average for the same week will stay about the same at 38 BCF. This will be a neutral to marginally supportive weekly fundamental snapshot that should keep prices firm for the short term.

The oil complex continues to be dominated by events and only to a lesser extent by what is going on in the macro economy or current supply and demand situation. With Japan already priced into the market the overall situation played little into the how oil prices traded last week. The main event for last week was the evolving situation in Libya and the greater Middle East. There were many headlines emanating from this area most of which fueled the fear level of investor/traders and thus resulting in a week of strong moves in oil prices to the upside. Secondarily the supply and demand reports for oil this week were supportive with total commercial stocks in the US falling for the sixth week in a row. The macroeconomic data was mostly supportive but the collapse of the Portuguese government damped some of the enthusiasm in the equity markets as participants were quickly reminded that the EU still has a long way to go to solve their debt issues.

Although oil prices are somewhat overvalued... basis the current fundamentals including the shut-in of Libya crude oil production...and due for a downside correction and significant move to the downside will more than likely turn out to be a buying opportunity and/or a point to add to buy side hedge portfolios depending on what side of the equation you are on. The world has already adjusted to the loss of Libyan crude oil and as I have been saying for weeks it has not resulted in creating any shortages of oil anyplace in the world. The combination of additional supplies from Saudi Arabia coupled with end users (refiners) working out the logistics of exchanging and trading sweet for sour grades along with a reduction in demand for crude oil from Japan have all contributed to the global flow of oil easily meeting the needs of the consumers. With Libya well priced into the oil market much of the latest round of increases in oil prices is starting to build into the risk premium an interruption in supply from one or more of the Middle East oil producers but certainly not Saudi Arabia. If the situation in Saudi Arabia deteriorates to a Libya or an Egypt the price of oil will spike significantly higher than where it is today.

The markets are quickly accepting the fact that the democracy protests which began in Tunisia late last year and has spread to many nations in North Africa and the Middle East (Syria is the latest to experience massive protests over the weekend) will be around for an extended period of time. Barring a major shut-in in production from other oil producers prices should recede a bit form current levels as some of the risk premium comes out of the prices. However, I do not expect a massive sell-off in prices anytime soon. Over the weekend there was an indication that now that the opposition group has retaken several oil towns Qatar reportedly has agreed to market Libyan oil with some exports possibly available in as short as a week or so. If this is accurate it could put some downward pressure on prices in the short term.

On the other side of the equation if the aforementioned becomes the short to medium term scenario I would expect oil prices to remain firm and slowly move higher as global supply, demand and commercial inventory levels are moving toward more pre-recession levels insofar as the oversupply situation that has been capping oil prices for a few years. With the global economic recovery well under way demand for oil will grow steadily ...as long as prices do not spike quickly above the $125 to $130/bbl mark. If consumption continues to grow the world will be moving back into a demand driven model and thus a positive for oil prices in the medium to longer term. So in either case...a supply interruption or the economic recovery resulting in oil consumption growth...prices are more likely than not to firm and move higher over the short to medium term.

My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my Nat Gas view at neutral but keeping my bias at cautiously bullish as prices are once again above the technical support level of $4.30/mmbtu.

I am maintaining my oil bias at cautiously bullish as the market is still focused on the geopolitics of North Africa and the Middle East. I am leaving my view at neutral for the moment as I think we could see a bit of easing in oil prices in the short term but we are once again in the mode of buying the dips as a strategy that will likely have the highest probability of success.
Currently asset classes were mostly higher last week but ended the week mixed as shown in the EMI Price Board table below.

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