Energy Market Outlook – January 28 2016

Energy News and Market Information for the week of 1/28/2016

Author: Jason Scarbrough


Natural Gas

The bulls are feeding on the extreme weather keeping prices firm (sort of) —BUT there has been no real rally and that is likely because of the fact that there is very little left in the chamber (so far) for Winter 2016.  The Polar Oscillation was extremely negative across the board a few weeks ago and now it is firmly back in positive territory.  This would indicate that the cold will be kept in the very northern latitudes of Canada – alluding the US.  Given the strong El Nino – this is likely to be the rule rather than the exception which was the past week’s clobbering of the east coast.

Today the EIA reported a larger than expected delivery of 211 BCF vs the 205 expected.  This is compared to 94 BCF a year ago and a five year average of 170 BCF.  If you will recall this was right about the time the late winter projections came in after a very warm January – looking at current projections, no such late winter freeze is expected – hence the lack of bidding in nat gas.  The prompt month is now a March delivery and I expect this to continue to sell off as we head into mid feb given our expectation of a warming in the lower 48.  The market has simply given up on any chance of a depleted storage for the start of injection season.  The story with WTI is still likely playing a part in the depressed commodity price as well –  the likelihood of crude continuing to rise on a strong dollar(although weaker today) and a world that is swimming in the stuff has to be slim.  The global markets have been crushed and it is inevitable that there will be some short covering and some value buying – is this a real reversal .. I doubt it.

We shall see.

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2016 Outlook Given Current Market

The EIA projects an average of $2.65 for cal 2016 – and over 3$ for 2017.

I would lean with closer towards the $2.10 mark or slightly higher

– LNG is dead in the water right now due to plummeting global commodity prices (see Cheniere stock) and generation demand for nat gas should take much longer than a 2016 to have a major change (new and converted generators will take longer to materialize).  It is likely that nat gas should rise toward the 4th quarter assuming the low rig counts will finally result in a material fall in production.  The $2.65 average for 2016 would call for a good bit of $3.00+ gas – while it is certainly possible that the market sees a 3 handle this year, that average seems a bit rich given the current market environment.  In addition – take the economy – the industrial complex is in a pretty bad recession killing a great deal of demand – and with the macro global economy and geopolitics the world is facing – it is a hard argument to make for much higher gas prices in the near future.

The Mexico export thing has been in the air for years, supposedly we are going to be exporting up to 10 BCF/day –given the “upstanding?”  values of Pemex and the Mexican government…. When will this actually happen and at what cost to US producers?


Technicals:  Bearish

Given the expiry week – it is difficult to really nail technicals on a short term outlook – however, if we take it at face value – the short term uptrend has been broken today.  However, the trade continues between the 50% and 61.8% levels from the recent low to the recent high (DEC – Jan).  Trade has been very choppy with the continued uncertainty re weather.

the MACD remains neutral  – and the lack of real movement in the market likely reflects the bulls weakness and the bears reluctance to move the market lower in the middle of winter.  A break below $2.067 would signal another drop below 2$ again in the front of the curve.

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Storage

The EIA reported a net gas storage withdrawal of  211 BCF this morning for the week ending January 22, 2016. This week’s report was above the market’s expectation which was centered around a withdrawal of 205 BCF. It compares bullishly against 94 BCF withdrawn in this same week last year and against the five year average withdrawal for this week of 170 BCF.

Gas futures remain weak as the market grapples with forecasts for continuing mild weather and the prospects of carrying huge storage inventories forward into Spring.

March 2016 NYMEX crude oil futures are currently up $0.92 at $33.22/Bbl. Oil futures have been higher for the past week on speculation that OPEC and Russia are open to the possibility of production cutbacks to address the crude oversupply that has consistently pressured the market lower for nearly two years. Oil prices are also supported by a weaker dollar after the Fed left interest rates unchanged at the end of its two day meeting making oil less expensive for buyers of other currencies.

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Weather

The forecasts are all over the place:

Monday’s 8-10                                                     Today’s 8-10

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El Nino remains a major contributor to our weather and I will continue to trust that it will keep the polar stream strong – keeping sustained cold weather out of the lower 48.  Not to say there will be no cold weather, but the market is telling us that there is no way it will meaningfully deplete our storage.  So I guess don’t store your winter jackets – but keep your shorts handy.