Energy Market Outlook – March 31, 2016

Energy News and Market Information for the week of 3/31/2016

Author: Jason Scarbrough


Natural Gas: Bullish

Is it over for low natty prices?  Nah – after being oversold, we may get the pre-summer rally for April and May.  But overall, natty may have found a bottom at 1.611 – right at support from 1998/1999.  While production is still near record highs despite prices, it has leveled off – and with rig counts at all-time lows we can extrapolate that at some point this will lead to a lid on production.

 According to Baker Hughes, the number of oil and gas rigs operating in the United States fell to 464 as of March 24, a significant decline from the 1,048 rigs operating a year ago.

As for the bullish opinion – I am guessing this won’t last into June.  It seems that price speculators grab positions this time of year hoping for a scorcher – only to unwind the positions as we get closer to the dog days and it isn’t so dire anymore.

However as the strongest El Nino in 2 decades wanes – according to the NOAA, there is a 50% of La Nina developing by fall.  This would take the polar jet stream (with El Nino has kept north of the US for the most part) back down into the lower 48.  Specifically the Midwest and Northeast getting back to the wonderful days of the polar vortex –  dumping snow and  frigid temps in the largest natural gas heating areas of the country.  There are also reports of a hot summer once again. Argot – bulls may have some ammo for the first time in close to a year.

In addition for a longer term picture, Mexican exports, LNG, and the likelihood that coal power plants that are retired will be replaced by natural gas burning turbines.

July-September Outlook NOAA

July-September Outlook NOAA

You could say the ammo is just salt though.  There are a tremendous amount of bearish fundamentals that are true for near term outlook and even longer term outlooks.

  • Storage:  production will remain strong due to high grading (going to your most productive and efficient wells and maximizing production),  and we will begin the injection season at an all-time high close to 2.5 TCF – so without a completely brutal summer, it is likely that we end the injection season above 4 TCF once again.

U.S. Natural Gas Marketed Production, Monthly

US Natural Gas Marketed Production Monthly

  •  LNG exports:   I have been harping on the hot air in this argument for increased demand for a while now.  Global  natural gas prices continue to get crushed and plans for LNG export plants are popping up all over the world.  The most profitable place to dump this stuff would be in Asia – specifically Japan and China.  Not only are the prices dropping there as well (5$ now down from close to 20$) Australia has plenty of natty for sale and they are much closer – making for much cheaper transport cost and a lower break-even point.  Who would you rather buy from?  With a glut of LNG floating around the oceans looking for a home prices aren’t likely to be going up — so it is likely there won’t be a demand for what is planned to be the US LNG exports of 10% of current production.

Australia Liquefaction Facilities (2016)

Australia Liquefaction Facilities

  • Mexico exports:  This one could be the most legitimate long term driver of demand.  However, this is Mexico we are talking about – as stated in previous reports – the level of known corruption in the state run Pemex, and the fact that I have been hearing plans regarding the sale of gas to Mexico for years now.. begs the question when will this happen?
  • Weather:   IT’S THE WEATHER!  The NOAA is predicting a hotter than normal summer.  OK, well, local meteorologist Travis Herzog has a tough time predicting the evening weather at the noon broadcast.  I  get the NOAA is a bit more “all knowing” than ol’ Travis – but still-  the point remains.
  • Coal to gas switching:  This is also a legitimate driver of demand – but in ERCOT alone renewables are becoming a huge part of generation – wind is up to 16,000 MW of capacity.  This is a trend that will continue across the country – it just makes economic sense,  and when it makes money sense, it gets done.   The point here is with more efficient homes, buildings, etc – along with rapidly growing renewable energy sources – How much natural gas generation will be demanded by the ISO’s?  I doubt that it will be a 1:1 ratio from coal to gas.
  • Industry Demand:   According to the Dallas Fed, manufacturing activity in Texas moved into positive territory for the first time in 3 month, but perceptions of broader business conditions remained negative for a 15th straight month.  The company outlook trended negative for a fourth straight month.  Labor market conditions continued to decline with twice as many firms laying off workers, as are hiring workers.  I have also been harping on the economy likely being in a recession – here is a respondents remarks  to the Dallas Fed:  “As a long-lead-time capital equipment manufacturer, we are working off backlog.  Anyone who says the the economy is not in recession is peddling fiction.”

Natural Gas Delivered – Commercials & Industrials

Natural Gas Delivered - Commercials & Industrials

  • WW III: the fact that the Middle East is starting the end times and commodities remain in the dumps should be a really big “tell” that that prices aren’t going anywhere anytime soon.

Technicals: Bullish with a Tight Leash

Dead Cat Bounce?

Dead Cat Bounce

The April contract rallied to settle just above $1.90 – the May contract didn’t sell off and therefore created a gap up yesterday and today there isn’t any follow through. However the rally from the lows was more like it  With the market down 5 cents at $1.94.  Near term support will be at 1.91 and resistance will be at the 100 day MA and the 50% retracement from the beginning of the most recent leg down. If the bulls can rally here and get above that resistance, there will likely be a run towards 2.10 then 2.15.  Any kind of strong rally will likely not get past 2.50.  this summer and in order to have a sustained rally (unlikely this summer) we will need to hear some very dire news about this winter.

Also showing bullish from very bearish are the MACD and the parabolic indicators.   I think it is likely that if there isn’t a rally here or in may – natty prompt will trade in a tight range between ~1.70 and ~1.90.

Further out the curve – in 17-19 summer and winter months are being bid up a good bit – but I would think that is just  speculation headed into summer.

Prompt Month Chart

Prompt Month Chart

Forward Curves

Forward Curves


Underground Storage

The EIA reported a net gas storage withdrawal of 25 BCF this morning for the week ending March 25, 2016. This week’s report was just above the market’s expectation which was centered around an withdrawal of 24 BCF and also above historical norms. It compares against 10 BCF withdrawn in this same week last year and against the five year average withdrawal for this week of 22 BCF.

Current May 2016 NYMEX natural gas futures are down $0.05 at $1.945/MMBtu. The April 2016 contract expired at the close of trading on Tuesday at $1.903/MMBtu. Near term weather forecasts are providing support to gas futures pricing. Warm weather in the West is increasing the outlook for gas fired electric generation demand from air conditioning load at the same time that cold weather in the East is expected to increase space heating demand. However, the upside potential for gas futures appears limited. As the market transitions into spring, resumption of storage injections will add to large existing inventories and provide a significant cushion against price increases. Continued strong gas production in spite of the low price environment is also a major contributing factor to a bearish gas price outlook.

May 2016 NYMEX crude oil futures are currently up $0.50 at $38.82/Bbl. Although oil pricing has rallied 40% from the February lows, many analysts believe that the correction is overdone and it will be difficult to maintain current prices without intervention by producers to address the persistent worldwide supply glut. There is plenty of talk about what could be done to address the supply/demand rebalance necessary to support pricing but very little action

Natural gas inventories currently stand at 2,468 BCF which is 1,002 BCF greater than from this same week last year and 843 BCF greater than the five year average.

EIA Underground Natural Gas Storage L48

EIA Underground Natural Gas Storage L48


Weather

A weakening El Niño continues. Tropical Pacific sea surface temperatures are still much warmer than average, but subsurface temperatures—El Niño’s “heat source”—have declined sharply. Tropical rainfall across the Pacific remains disrupted: suppressed over Indonesia, enhanced farther east. Transition to ENSO-neutral is likely by early summer 2016, with close to a 50% chance for La Niña to develop by fall.

This is going to be a major driver of price this summer and winter.  IF we get La Nina formed in the fall as the NOAA is giving 50% chance – this could very well drive prices out of the doldrums.  The spring should be quite mild as we had a very unusual report of an injection last week.  And it is looking like there is going to be slight heating demand in the north with slight cooling demand in the southwest and west over the next few weeks.

Weather 1

 

Weather 2