Energy News and Market Information for the week of 1/28/2016
Author: Jason Scarbrough
Natural Gas: A Brave New (old) World – Neutral on the front of the curve, bearish on the bank
Back to the low prices of the 80’s 90’s?
Low prices are supposed to be the cure for low prices – but how long will that take? With an abundance of natural gas in storage and production still near record highs from 2015 it would seem that prices are set to stagnate for some time. The US industrial complex is in a recession – factory orders are way down. I believe the US economy is in recession save the cheap $ giving consumers the confidence to continue spending. Retail is actually the only leading indicator that is positive. So with all of that information – how can one make an argument for anything but stable or falling meaningful demand for natty.
As we have been noting a great deal of late – the global crash in commodity prices has completely negated the LNG export concerns for a great deal of increased demand overseas. The spread in prices isn’t really attractive enough for producers to sell it anywhere but here in the good ol’ US of A so far – and the much anticipated Cheniere Sabine Pass facility just sent its first load to Brazil just happened – and the stock is at 35$ down from over 80$. I would say the market isn’t banking on that taking off just yet. I will say that prices here may be low enough for it to make sense long term to export… but it has taken so long through the bureaucracy of our federal government –it will likely be many years before that is really a viable option.
Another issue that doesn’t seem like it is going away anytime soon is oil prices. Crude being this low from its high’s is going to keep all commodities down and is frankly an indicator of how bad the world economy is right now. China apparently isn’t immune to bubbles – if you haven’t seen the 60 minutes piece on their real-estate bubble – see it here… it is incredible – their demand for commodities (which was a very big piece of world demand) has cratered. In fact, global demand has dropped and production continues to increase (IRAN) with no cuts coming from OPEC. Why no cuts, simply put, the Sunni Kingdom cannot and will not fund a Shia nuke/ military complex. The terrible deal John Kerry helped make with Iran has opened up the flood gates for money and oil for the known terrorist funding country. Low oil prices are a strategy for Sunni survival and a prevention of what would likely be WW III if their cold war with the Shia (Iran) became a hot one.
That isn’t to say that prices won’t go up, they will. Production will inevitably drop below consumption causing us to eat away at storage. Maybe 4th quarter 16… where we have previously stated we think start of a reversal is very possible – but if there isn’t a very hot summer …
As I stated earlier, low prices are the cure for low prices. But it isn’t looking to bright for natty bulls in the near future.
Forward curves from jan 1 to today – the DEC 2021 contract is about to go below 3$
As I write this the prompt month has broken ANOTHER low from December at $1.682, trading at $1.66 with a report coming tomorrow that is a fraction of the 5 year average. These are levels not seen since the late 90’s – ~$1.60 beeing a key support level between 1996 and 1999 before the spike in 2000, beginning natty’s run throughout the oughts from the start of investor money pouring into the commodity markets making and losing people billions. The charts are ugly so there isn’t really any key calls to make here – no reversal is anywhere in sight on the charts. The MACD is extremely negative with a VERY slight change in direction over the past week from the consolidation in the lower $1.70’s.
Support is at $1.62 from 1999.
Long term view of natural gas – yes, we are that low!
The EIA reported a net gas storage withdrawal of 117 BCF for the week ending February 19, 2016. This week’s report was well below the market’s expectation which was centered around a withdrawal of 135 BCF. It compares very bearishly against 205 BCF withdrawn in this same week last year and against the five year average withdrawal for this week of 144 BCF.
Natural gas inventories currently stand at 2,584 BCF which is 615 BCF greater than from this same week last year and 577 BCF greater than the five year average.
As for tomorrow – the market is looking for a measly 40 BCF to be delivered. That comes in a range from 32-65. The five year average is $137 BCF and last year was 229 BCF!!