Nat Gas never got caught up in the global Spanish bailout rally nor is it currently getting hit with the sell-off as the rally faded this morning. Nat Gas is still reeling after last week's 6 BCF greater than the expected injection report. Not much has changed in the Nat Gas market over the last week or so. We are now in the summer cooling season with the eastern half of the country to experience mostly normal to above normal temperatures with the west coast continuing to expect below normal temperatures. I would call the current 6 to 10 day and 8 to 14 day forecasts as neutral for Nat Gas as although there will be some cooling demand for Nat Gas it does not appear that the weather will be as severe as it was last year at this time. As such it means that we will not likely see much of an impact on Nat Gas demand from the next few weeks of the summer cooling season on the weekly Nat Gas inventory injections.
The market is currently hovering near the lower end of its trading range and struggling to bounce off of this level. It seems that the market sentiment is continuing to move toward a bearish bias with many participants starting to look to a test of the $2 to $2.10 level and thus an extension of the trading range that has been in the process of forming. The main concern in the market is the risk of hitting maximum storage capacity limits prematurely. Normally the injection season runs until the end of November and even into early December depending on how early the winter heating season gets underway. With storage currently at 69.9% of capacity (Producing region at 80.7%) weekly injections are going to have to underperform for the next several months to avoid inventory capacity issues. The first three months of the season has seen injections running between 70 to 73% of last year's injection levels. Now that we are in the cooling season the temperatures are going to have to be not only much above normal but also much above last year which experienced a very hot summer (first half of summer).
Bottom line it is looking more and more like the producing sector is going to have to ramp up their production cuts (over and above what has already been cut) to avoid a logistics mess. If the industry is going to avoid what could be a disorderly operating period if inventory capacity is filled and companies are forced to cut production based on where the pipelines and storage facilities dictate rather than the companies getting ahead of the problem and more economically optimize their individual systems. I still think we may start to see additional cuts prior to inventory hitting capacity.
This week the EIA will release the weekly Nat Gas inventory report on its regularly scheduled day and time...Thursday, June 14th. This week I am projecting the thirteenth net injection into inventory of 70 BCF. My projection for this week is shown in the following table and is based on a week that experienced some cooling related demand. My injection forecast is based on the fact that only minimal cooling related demand occurred last week. My projection compares to last year's net injection level of 72 BCF and the normal five year average net injection for the same week of 88 BCF. Bottom line the inventory surplus will narrow again this week versus last year and the five year average if the actual data is in sync with my projections but not nearly as much as we have seen over the last several months. In fact some of the projections are calling for an injection above last year.
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 7111 BCF. The surplus versus the five year average for the same week will narrow to around 669 BCF. This will be a neutral to slightly bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections and consensus are forming in the range of about 60 to 85 BCF.
A slightly bullish data point hit Friday when the latest Baker Hughes rig count showed a decrease of 23 rigs deployed to the Nat Gas sector. With this week's decrease the total Nat Gas rig count is still hovering at the lowest level in about 13 years as the ratio of the spot WTI price to the spot Nat Gas actually receded off of its record high from a few weeks ago. Rigs deployed to the Nat Gas sector remain well below the threshold (around 800) that many analyst would expect to see production starting to decline.
Rigs deployed to the oil sector increased this week by 28 to 1414. Horizontal rigs decreased by 6 to 1177 but still remain near record high levels. The following chart kind of says it all when you plot Nat Gas rigs versus oil rigs and place the spot WTI/Nat Gas futures market price ratio on the chart. As long as the price trend continues E&P players are going to continue to be biased to oil drilling. The oil to Nat Gas price ratio widened last week to 36.5 the previous week mostly driven by the downside correction we have seen in Nat Gas prices over the last several days. At this level rigs are still likely to continue to be moved out of the Nat Gas sector and placed in the oil sector.
The decline in Nat Gas rigs still seems like it has room to decline... as recently as the fourth quarter of 2009 less than 700 rigs were deployed to the Nat Gas sector. If the producing economics of Nat Gas continue to decline or even stay at current levels as we approach 2013 we could see an acceleration in the decline of Nat Gas drilling as it appears that many producers are not sufficiently hedged for 2013 and beyond. On the other hand if oil prices continue at current price levels more and more rigs are going to be deployed to this sector. Even with more rigs being deployed to the oil sector it will result in more Nat Gas production as about 60% of all Nat Gas produced comes from associated wells.
I am keeping my view at neutral to see if Nat Gas is able to hold onto the developing trading range. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
I am still maintaining my oil view at neutral with one eye toward the bullish side. I am starting to expect the oil complex to settle into the $80 to $90/bbl trading range basis WTI and $95 to $105/bbl basis Brent. At the moment it is not so much that the current fundamentals have changed it is more related to the fact that the market sentiment is changing as participants move into the perception mode based on more stimulus which could result in an improvement of the forward fundamentals from a demand perspective (mostly based on China easing).
The week before last the market sentiment was bearish with little short term hope for any resolutions in Europe nor improvement in the global economy. Last week the market sentiment stated to change as talk of a Spanish bank bailout emerged. In addition China lowered short term interest rates to jump start its economy while talk of more stimulus in the form of another QE3 in the US dominated the airwaves (even though Bernanke gave no hints at his testimony last week). For the week the changing market sentiment resulted in gains in most risk assets (see below for more details). The weekend brought more support for the changing market sentiment with an official bailout of the Spanish banks over the weekend along with some supportive macroeconomic data out of China including a decline in the inflation rate which gives the government even more room to continue to move forward with an aggressive easing policy.
At least for the moment the selling of risk asset markets has subsided as short covering and some light new buying is now emerging. I do not know if there is a lot of upside in oil and equities at the moment but it certainly seems that the downside is now limited. Oil seems to be settling into an $80 to $90/bbl trading range basis WTI while the Brent trading range is $95 to $105. As long as progress continues to come from Europe on its sovereign debt issues while stimulus and easy money policies evolve in China and the developed world economies... like the US the unabated selling we saw in risk asset market just a few weeks ago is less likely to occur in the foreseeable future.
There are still many significant events in the month of June that can all turn out to be market moving events. So irrespective of the direction volatility is going to remain at an elevated level throughout the month. The remaining events start with the OPEC meeting on June 13-14. However the first major market moving event is the Greek elections on June 17th followed by the next round of talks between Iran and the West on June 18-19 then the US FOMC meeting on June 19-20 with the month ending with the EU Ministers meeting on June 28 - 29th. So in spite of the Spanish bank bailout over the weekend the event risk for the month of June remains at an exceptionally high level.
Currently markets are lower as shown in the following table.
Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
Providing quality reviews, articles and writings on crude oil, energy and gas online.
No comments:
Post a Comment