Energy News and Market Information for the week of 7/20/2016
Author: Jason Scarbrough
Natural Gas: Short Term Neutral – Overall Bearish
Natural gas just can’t seem to break out further after a very big move to the upside since the July contract took over prompt back in June. The prompt shot up close to 50% from below $2.00/MMBtu – to testing $3.00/MMBtu for the first time since May of 2015 within a month. Yet even as the summer outlook continued to get worse (for our power bills) this month prices haven’t sniffed 3 bucks in 3 weeks. The CDD outlook for ALL of the US for the next two months is very high, so why aren’t the natty bulls taking advantage of this and making a run at $3.00 + again. Could this simply be a lull, as the market is taking a break after being VERY over bought? Perhaps, but I think that there are many other factors weighing on natty prices.
IT IS HOT in here, so take.. never mind. But it is REALLY HOT and the outlook doesn’t show any relief. Currently – injections are running about half of the normal pace to this point in the season. To the point – storage will be the driver of prices heading into winter – and because we started injection season with over 50% of the already very high 5 year average (we have basically been setting a new record every year – other than the polar vortex), it is likely that we will still end the season with over 4 TCF in the ground (or close to it) even at this feeble pace. Note the prices for Oct/Nov natty vs December OCT $2.73 – NOV $2.91 – DEC $ 3.18. This would indicate to me that the big end of season number is a likely scenario.
After all of the summer demand ebbs – it doesn’t look like the winter demand will exactly flow!
The US industrial complex is in a recession and has been worsening since the start of crude’s decline in 2014. So the demand from this sector ( very large power and natural gas consumption ) is stagnant at best. In addition, natural gas production IS falling by the month, but by 100 bps or so a month- nothing that would suggest the trend has anything to do with the measly injections.
This would tell us that, for all intents and purposes, close to 100% of the massive demand that is keeping injections so low this summer is coming from air conditioners. So eventually, the heat will subside (assuming the coming end times out of the middle east don’t leave us a barren desert wasteland). And when temps ebb – so will demand. In the meantime, rig counts have been creeping up over the past 2 months – so inevitably, so will production. Anticipation of this is likely keeping a lid on prices.
A theme that has really fallen out of favor over the past 6-10 months , is massive US exportation of natural gas. The narrative on this topic has changed since the global commodity markets have cratered in the past 18 months. The best indicator for what markets are thinking about our LNG exports is to look at the company leading the charge and with the only functioning facility in the country as of today – Cheniere. The massive demand that will drive prices up in the US coming from East Asia and Europe – just isn’t really there.So it is really difficult to make a case for rising prices based on LNG anytime soon. While LNG will make its mark on supply/demand levels in the United States, it will not be in 2016.
There is a bit of contradiction in the charts these days – and I think that stems from the fact that we are staring the dog days of summer in the face and yet the bulls can’t get the market to break $3.00/MMBtu so far (bears won’t sell into the heat coming). Both the August contract and the continuous are showing a “weak” head and shoulders pattern.. indicating a move to the downside – and it looks like the neckline is trying to be broken as of this morning. We have been using the fib retracement from the move up after the gap up from 5/27. The bears have been unable to break below the 38% retracement level – again finding support there this morning. However, today’s trade suggests to me that a break below is imminent.
Both the MACD and the Parabolic indicators have turned sharply bearish given the long bullish indication run since the end of May.
After reaching a ridiculous peak of close the $3.40/MMBtu – the winter strip is also breaking down and likely headed back to or below $3.00 mark – a much more reasonable price (even though I contend it will continue to come down as the contract delivery months draw closer to prompt).
The concerning longer term technical indicators that … for now… we will conclude they are there because of the time of year. The fact that the prompt month has (very strongly) crossed the 200 day simple moving average for the first time since it peaked it’s head above it in Dec 2014 and this strong of a move above since the end of 2013… right before the market headed above $6.00
That is also the last time that the 100 DMA crossed the 200 DMA … a very bullish intermediate term indicator called a golden cross…which also happened to occur this week.
Again – I think this is likely an anomaly given the fundamentals we are staring at – but it would be ignorant to ignore the possible significance of the golden cross.