Energy News and Market Information for the week of 11/18/2016
Author: Jason Scarbrough
Happy 88th, Mickey! The bulls miss again!!
Natural Gas: Neutral
After a summer where one of the major themes in the natty market was that inventories are falling too short to keep pricing suppressed – the bulls made their push on the front of the curve through the middle of October – driving the prompt toward $3.50 for the first time since December of 2014 (this NOV 2016 contract gave us the year’s high print on of $3.366). A great deal of the move was a result of the traders “running stops” – triggering stop loss buys and thus, a short squeeze (driving the market higher) – speculative shorts shrank by more than 50% from August through October to a two year low.
The move was short lived as more and more bearish information came in regarding production increases, bearish weather patterns, and, what turns out, another record setting year for natural gas storage (4047 BCF in the ground and growing). The broader market, however, never bought into the narrative that prices are headed higher “now.” Looking out the forward curves – anything past a 2017 delivery barely budged during the front of the curve’s ~25% rally in less than a month. In addition – the trade for the 2017 spring (the conclusion of withdrawal season) has proven to be skeptical of any real move higher as well. The March/April spread was unable to sustain a bullish position throughout much of the “summer of weak injections” through the October rally – and has since fallen off of a cliff, signifying that the market isn’t worried about a shortage of supply.
Last summer’s heat lead to the strongest gas-fired send-out on record. In August gas delivered to electrical power rose by 4.1 Bcf/d (+12.3%) year-on-year to a record 37.5 Bcf/d. The average demand for July and August totaled a record 74.5 Bcf/d or 10.6% greater than the 2015 summer and 23.7% greater than the average of the 2010-2014 summers.
Record temperature and growing power generation wasn’t the only reason for the demand increase. It was also due to the United States becoming a net natural gas exporter. Total U.S. exports in August rose by 46% year-on-year, which was seen in both pipeline exports (30% increase) and LNG exports (869% increase, thanks to Sabine Pass). In return, net imports fell 29% year-on-year and fell by 66% to the 2010-2014 average, to an eleven-month low (and second lowest amount on record) of 1.5 Bcf/d. So, given the fact that rig counts were at all-time lows, we just went through the “most recent” hottest summer ever, injections ran about 50-60 % to YOY numbers from 2015, Cheniere is sending ships filled with our gas overseas, and the farmer’s almanac is calling for this coming winter to be as frigid as the polar vortex – why isn’t the market at 5$??
Simple, supply and demand. While winter can change the game for the bulls, the farmer’s almanac is one of the only places that is predicting a cold winter…. All the scientific models are still showing a normal to warmer than normal US (see below). In addition the summer demand wasn’t helped by the industrial complex, which continues to be in a bad spot (essentially in a recession for more than a year). The massive demand from air conditioners this summer simply wasn’t enough to drain the massive inventory we had at the end of the 2015/16 winter. Had the economy been booming, the nat gas demand for industrial and power production (at least here in the US) would have written a very different story for our current record natty inventory heading into winter – giving prices a wind in their sails not seen in a good while.
There is no question that it is likely the current suppressed prices aren’t sustainable if the nat gas global demand trajectory holds true (which is something to debate in itself) – but it doesn’t look like there is a coming shortage of a glut anytime soon. While the cratering of global energy prices has cut rig counts to all-time lows recently – the efficiency of the wells that are out there have kept and continue to keep production at a respectable level. In addition – LNG exports … while growing… are a far cry from the major draw on the US supply that it was expected to be several years ago (see NYSE: LNG run-up and then reality).
LNG stock – promising investment?
Winter seems to have finally showed up – and according the NOAA – La Nina is here and has a 55% chance of sticking around for the remainder of the winter (creating a very cold Midwest and northeast). So the market is now in kind of a “no man’s land” of waiting to see what the weather does (as per usual). The prompt month and the front of the curve seems to have found some comfort at the $2.70-2.90 range and ~$3.00 respectively– so I would put a marker at this spot as the line of scrimmage this winter. So let’s see what old man winter has in store for us – but at this point I would be selling any near term rally’s into the spring and looking to hedge further out the curve – 2018-2021 or so.
Technicals: Neutral – but the market seems to have found some support
The continuous contract is showing a consolidation range with the 100 DMA acting as the resistance (top of the range) for now. You can see the upward trend started in the market back in August has twice been broken to the downside – after a brief “false” breakout to the upside. The parabolic indicators continue to show bearish, BUT the MACD has formed a bullish crossover today. The major gap up when the DEC contract took over is a non-event – simply the spread that quickly corrected itself to reflect the low demand for delivery. We are using the fib retracement from the OCT highs to the NOV low – $2.859 will act as the first resistance.. a breakout above there (and the 100 day) will likely find a headwind at $2.956 (the 50% retracement) and then of course – $3.00.
It will be hard to move a great deal lower for a sustainable term – but there will be support at $2.54 and again at $2.50.
NOTE: there is still a gap to fill at below $2.00 – highlighted in red on the continuous chart.
The December Chart
This chart is skewing a bit more bullish than the continuous
- Higher resistance/higher support
- Both Parabolic and MACD are bullish
- The near term trade is showing a much less mature consolidation pattern and more of an upward trend (although not really formed either)
The cold weather is here – and this chart is certainly suggesting a move higher in the near term – but likely from an oversold situation vs any real concern for supply in DEC.
The EIA reported a net gas storage injection of 30 BCF for the week ending November 11, 2016. This week’s report was above the market’s expectation of 25 BCF. It compares against 26 BCF injected in this same week last year and the five year average for this week which is an injection of 3 BCF.
The market appears to be taking a wait and see attitude before considering new direction. At current levels further price declines may be hard to come by ahead of expectations for the delayed start of winter space heating demand. On the other hand weather is always a wild card and a shift to below normal temperatures could easily push futures back up well above $3.00/MMBtu even with record storage inventories – as stated above.
Natural gas inventories currently stand at another new record all-time high of 4,047 BCF which is 51 BCF greater than from this same week last year and 261 BCF greater than the five year average.
We expect at least one more healthy injection this season before withdrawals begin.