Netrual - oversold
Looking at the commodity in a more short term outlook than the previous few reports, we will focus on weather and production (duh). The NOAA is reporting that this El Nino could end up being the strongest on record – stronger than the 1997 event (current record). The first two months of 1998 were the warmest and wettest in the 104-year record of temperatures and precipitation measurements for the lower 48 states. During the period January - February, the national average temperature was 37.5 degrees F compared with a normal of 32.1 degrees F. The previous record was 37.0 degrees F in 1990. For precipitation, 6.01 inches fell, compared with a normal of 4.05 inches. The previous record was 5.7 inches in 1979. December wasn’t quite as extreme – but overall heating demand for the major consuming regions for that winter was very low creating a supply glut. Given that currently one could argue that we already have a supply glut and if production keeps up with little demand this winter, we won’t have anywhere to put the gas at towards the end of storage season next year. A “warm” winter isn’t guaranteed – but it sure looks like we are going to get one.
Looking at the trade in the markets now – I believe the prompt month is oversold, so there could be a consolidation period once again before heading lower. By the first quarter of 2016 I would think the prompt will test $2.00. Given the ~20 cent spread between NOV to DEC and again from DEC –JAN – the market is still holding out hope for some cold weather to hit. If it does – there will likely be a massive short squeeze driving the market up temporarily. (Currently the Street’s bearish position is the 19th
largest ever at 68,958 net shorts) But, should El Nino give us the winter I am guessing we get – I don’t believe any rally to last through the 1st
I do expect any sell off to be heavily on the front end of the curve ie the first 6-12 months of the NYMEX futures – there is just too much out there to suggest MANY coming catalysts for higher prices in the coming years to have a major impact on the already very cheap back end of the curve (DEC 18 at $3.20!).
Bearish - oversold
Bulls continue to fail breaking through key resistance levels and the bears area looking at these mini rallies as selling opportunities – pushing the market lower and lower. Since our last report – the same pattern described then has happened two more times (green arrows). The most recent test of 2.60 (major resistance) came after the market tested the much anticipated YTD low at 2.44. The market moseyed on back up to 2.60 and then “smack” back down to retest the lows. This week it would seem that the major psychological level at 2.50 has become the next to hold off the bulls. The fact is, it is much more likely that any of the recent upward movement is mostly profit taking and looking for another place to enter the market by sellers. Today the prompt continues to get crushed after a massive injection of 81 BCF forming a shooting star – a close below yesterday’s lows would be a very bearish signal after breaking down a major support level at 2.44 and hitting 3 year lows. The market would seem to be headed back to that 2.20 support level from 2012. However the prompt is certainly oversold and a move that massive in just over 2 months heading into winter would seem unlikely (but not out of the question.
(physical buyers have to be salivating at these winter prices).
The ONE bullish signal we were anticipating (it looked inevitable to happen very soon)– the “golden cross” has comically started to diverge again (gold circle) - --
This is all happening in the front part of the curve… namely the remainder of CAL15 and CAL 16. The back of the curve.. while red, is holding pretty steady widening the contango spread.
Natural Gas Inventories currently stand at 3,814 BCF
The EIA reported a net gas storage injection of 81 BCF this morning for the week ending October 16, 2015. This week’s report was below the market’s expectation which was centered around an injection of 88 BCF. It is bullish against 94 BCF injected in this same week last year and against the five year average injection for this week of 86 BCF.
December 2015 NYMEX crude oil futures are currently up $0.26 at $45.47/Bbl. Oil prices are having a difficult time gaining traction as declining production trends in North America have not yet translated into lower oil storage inventories. The situation is not helped by the fact that OPEC and other major oil producers such as Russian have refused to consider production cuts despite the oversupply and Iranian oil exports anticipated to resume later this year will only make the situation worse.
In addition – thanks in part to the administrations weak foreign policy the Soviet Union Russia essentially invading Syria, Ukraine and now starting operations in Iraq, Putin is clearly setting Russia up to control the northern Middle East.
Natural gas inventories currently stand at 3,814 BCF which is 434 BCF greater than from this same week last year and 163 BCF greater than the five year average. Storage is heading towards a 90% chance of taking out the previous record of 3.93 TCF.
As stated above – this El Nino is a monster and will likely have a great deal of impact on our weather through the end of winter. The outlook for winter generally favors below-average temperatures and above-median precipitation across the southern U.S. and above-average temperatures and below-median precipitation over the northern U.S., according to the NOAA. Keeping power usage and nat gas usage far below normal.
There has been very little cold weather across the country so far this fall – and it looks like that will continue at least for the next 6-10 days. This will likely lead to large storage injections for the next few weeks.