Warm Weather Equals Pressure On Nat Gas Prices

I know I sound very repetitive but the weather is pretty much the primary driver of Nat Gas futures prices and many cash locations around the country. Not only is the nearby temperatures balmy in many area over the eastern half of the US but the latest short term temperature forecasts from NOAA are biased to the bearish side also. Today the Feb Nat Gas futures contract expires and as it stand as of this writing it will likely expire in negative territory as well as in a contango versus the soon to be spot March contract.

From a fundamental perspective the Nat Gas market is currently bearish especially basis the latest NOAA six to ten day and eight to fourteen day forecasts. Both forecasts are showing a majority of the US expecting above normal temperatures for the period February 3rd through the 11th with only spotty areas of below normal temperatures over selected areas along the east coast. The eight to fourteen day forecast is even more bearish than the shorter term forecast as the only area of below normal temperate in a small section of New England... cold area ...but much lower population location than further south along the northeast coast which is expected to be much less winter like. Simply put the Nat Gas market is running out of time for winter to have a significant impact on end of season inventory levels.

Of interest last year the Feb, 2012 contract expired at $2.503/mmbtu on day in which it lost $0.20/mmbtu of its value and closed in a contango the March, 2012 contract. Today the Feb, 2013 contract will be expiring at a considerably higher level but the conclusion is pretty much the same. Warmer than normal temperatures in the heart of the winter heating season will simply result in a weak Nat Gas market. As I discussed in detail last week the current pricing levels for the Nat Gas futures market have already priced in the improvement we have already seen in demand this year but at the current levels unless the weather pattern starts to make a sustained change toward the colder side we may see a much larger sell-off than we have seen so far and a possible test of the $3/mmbtu level prior to the end of the heating season.

From a technical perspective the market is still in the $3.20 to $3.50/mmbtu trading range after the false upside breakout experienced last week.The expiring Feb contract made a pass at breaching the $3.20/mmbtu support level this morning (was as low as $3.207/mmbtu) but so far support has held. This trading range has been in play since mid-December but the way the market has been trading of late I would not be surprised to see the $3.20/mmbtu support level solidly breached well before the end of the winter heating season... especially if the forecasts continue to be bearish.

This week the EIA will release its inventory on its normal schedule and time... Thursday January 31th at 10:30 AM. This week I am projecting an average withdrawal of 200 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 149 BCF and the normal five year net withdrawal for the same week of 178 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year and versus the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.

If the actual EIA data is in line with my projections the year over year deficit will widen to about 208 BCF. The surplus versus the five year average for the same week will come in around 298 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a range of 180 BCF to about a 210 BCF net withdrawal with the consensus still forming.

WTI is still hovering near the upper end of the upward trading channel that has been in play since the beginning of this year. The spot WTI contract is also gaining momentum on Brent as the March WTI/Brent spread has now retraced about $0.70/bbl since peaking after the Seaway pipeline constraint news hit last Wednesday. The spread has narrowed back below the $17/bbl technical support line (now resistance) and seems poised for a further correction to the downside as the Seaway situation seems to have moved out of the foreground for the moment.

On the economic front yesterday's durable goods data from the US was very positive beating the previous month as well as the market consensus. The reaction was dampened by an underperformance on the housing data side. Today the US Central Bank will start its two day January FOMC meeting with the meeting announcement due out tomorrow mid-day. The market is currently expecting the Fed to remain status quo on their short term interest rate and quantitative easing policies. However, the market is much more interested in the comments as to see if there are any signs as to when the Fed will begin to move to a less accommodative monetary policy. More and more of the market participants are expecting the Fed to slow down its massive QE bond buying program as many also view the US economy as starting to recover at a better pace than last year. If that is truly the pattern of the economic recovery in the US the Fed will have to begin to shrink its balance sheet as the susceptibility for inflation will certainly rise if they do not.

Barring the Washington politicians completely screwing up the sequester negotiations as well as the US budget and fiscal cliff over the next several months the US economy does look like it is gaining momentum. If so I think the Fed will be forced to start not only thinking about an exit strategy but also making it know to the market. If this turns out to be the scenario it would be bearish in the short term for oil and most major commodity markets as it will signal that the Fed will not let inflation turn out to be the next major economic hurdle in front of the US economic recovery. With the Fed's policy also tied to the US employment situation we could get another sign on Friday when the monthly US nonfarm payroll data is released.

Global equity markets have given back some of their year to date gains over the last twenty four hours. Most global equity markets have been in a strong uptrend so far this year and are nearing multi year highs. Many of the bourses are also in an technical overbought mode and are susceptible for a round of profit taking selling. We may have seen some of that over the last twenty four hours. As I mentioned in yesterday's newsletter there are many data points hitting the media airwaves this week that could act as a catalyst for a market correction. If we do get an equity market correction it will likely flow to the oil complex as well as the broader commodity markets.

I am moving my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish at the moment.

I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.

Markets are mixed as shown in the following table. Providing quality reviews, articles and writings on crude oil, energy and gas. Crude Oil Brokering Crude Oil Facilitating Oil Brokers Oil Facilitators Global Oil Brokers Global Oil Facilitators Crude Oil Brokers, LinkedIn Crude Oil Brokers On Twitter Oil Facilitators On Twitter online.