Energy News and Market Information for the week of 10/7/2016
Author: Jason Scarbrough
Natural Gas: Neutral
There is a clear feeling of a lack of determination by the natty bears in the face of a very meek finish to injection season heading into winter. The blistering heat of another record setting summer has left the once confident bears looking for another record in the ground at the end of October – facing the reality of a finish to the injection season lucky to be as high as 3.9 TCF in the ground. The 5 year average at the end of injection season is 3,831 BCF – so while 3.9 is very disappointing looking at it from last April’s expectations, it is still a very respectable number to start the winter with. Having said that, there is definitely a “bullish feel” to this market and it would seem an effort from traders to fundamentally shift the trading range higher going forward.
As far as the winter goes – it seemed to only get more and more bearish as we moved through the summer. There was once a better than 60% chance of La Nina forming last June. This would have implied much cooler weather for the Midwest and Northeast throughout the winter as the polar jet stream was predicted to drop very low into the US creating a similar pattern to that of the “polar vortex” that froze much of the country east of the Mississippi – while also having us start the injection season lower than we have seen since long before the shale boom at 824 BCF in the ground. However, El Nino has lingered keeping forecasts warmer than normal and the forecast for La Nina have all but disappeared as NOAA forecasters have dropped the La Nina watch.
The only major forecaster predicting any real cold this winter so far is the ol’ trusty Farmer’s Almanac (here) . This isn’t to be taken too lightly though as this is the one place that predicted the bitter cold in 2014.
2015 vs 2016
Overall 2016 Summer Overview
Looking like a slow winter for withdrawals here?
As mentioned above – the injections this summer ended up running around 50% or so to the norm. Did production drop that much due to low natty and crude prices globally? NO. while production did drop – a good bit compared to 2015 – it is still very close to record highs. The fact is, we are still producing more natural gas than we ever have for all intents and purposes. Given the state of the industrial complex in the US (very bad) and the lack of industrial and international demand for natural gas – we have to conclude that weather played a very significant role in reducing the net production in the US. The heat was just that brutal on a very broad scale in the lower 48. Other contributing factors include LNG exports (this isn’t nearly as big of a factor as once thought) and Mexican pipeline exports – which are up 6,206 MMcf/d (+6%) from june 2016 to july 2016 and up 11,019 MMcf/d (+11%) form july 2015 to july 2016 – a total of 112,050 MMcf for the month.
From a very macro view – we are producing a sh**load of nat gas.
A more near term look at natural gas production for near term purposes – showing the “recent” decline – but note the trend:
The net production for 2016- changing the dynamic of the natural gas market heading into winter and 2017? This lack of net production all summer has certainly given some pause to the bears and given some long missing cojones to the bulls. Production has been declining at a rate of ~ .4% per month since the all-time high of 78.8 Bcf/d in September of 2015. But there will still have to be a great deal of winter demand to make a serious dent in our storage. Looking at the trade in the spring of 2017 and the calendar years of 2018 and 2019 – – the market isn’t exuding confidence that we are going to be lacking natural gas supply in any way.
The indicators have tried to turn bearish several times over the last months –but the bulls continue to take advantage of the weakened bears and keep the charts momentum pointed higher.
Before I get into the shorter term charts – a look at a long term chart has formed a very interesting pattern that would indicate a reach to fill a downside gap made back in December of 2014 at $3.444. The momentum is there and the lack of fortitude by the bears in the face of the coming winter would make this a very real possibility. And this is the chart I am paying attention to right now. Very clear bullish break out if any follow through.
As for the more immediate indicators – let’s take a look at the continuous and the prompt (November) charts.
The prompt chart has been in a consolidation pattern for the entire summer up until the bulls started to break out last month. This formed a clear rising channel with continuing higher highs and higher lows. The MACD has tried to turn bearish twice since the decisive move to bullish back on August 23rd and both times have been very short lived. The same goes for the parabolic indicators – it would seem that the bulls are just taking breathers before they move the trade higher. Trade broke out of the channel today to the upside – indicating another significant move higher. But I would like to see some follow through next week before calling for $3.50 given this feels like a deliberate move to trigger stop limit orders at this point. I am keeping the arrow in there showing the “golden cross” that occurred back on 7/18/16 signaling a major move to the upside. This formation is certainly proving reliable so far.
The newly prompt November contract has been in a consolidation range since the first of the summer as well – this one is more clearly defined and in a tighter range ~2.80-3.15. Unlike the continuous chart – there hasn’t been an upward trend set – just sideways trade and the trade today would suggest a breakout to the upside from this range. Again, I would like to see some follow through before declaring another bullish run. But if there is follow through – it might look like we will have to wait until late winter (and no weather) for the bears to start knocking back this advance. And if we do see some extreme weather this winter – look for the bulls to stretch their legs and move this thing a good bit higher.
The EIA reported a net gas storage injection of 80 BCF for the week ending September 30, 2016. This week’s report was above the market’s expectation which was centered around an injection of 71 BCF but still well below historical norms. It compares against 124 BCF injected in this same week last year and the five year average for this week which is an injection of 95 BCF.
Natural gas inventories currently stand at 3,680 BCF which is 74 BCF greater than from this same week last year and 205 BCF greater than the five year average.