December natural gas nearly notched a double-digit loss Wednesday as traders prepared for a government inventory report likely to show an inventory addition well above last year’s and the five-year average. At the close December had fallen 9.3 cents to $3.652 and January had skidded 9.4 cents to $3.749. December crude oil fell $1.06 to $95.74/bbl.
“The natural gas market has given back Tuesday’s gains and is back on the defensive, with ongoing tension between still-rising storage levels and the prospects for seasonal storage demand in the weeks and month’s ahead. We continue to see potential for prices to rally toward $4.50 in the month’s ahead, much as it did a year ago, but the market has definitely had more difficulty gaining traction than last year, putting it on a later schedule for a rebound,” said Tim Evans, analyst with Citi Futures Perspective in New York.
Still, rising storage levels will be on center stage Thursday when the Energy Information Administration releases its inventory report for the week ended Nov. 4. Last year 26 Bcf was injected and the five-year average stands at 23 Bcf. This week’s estimates look to continue the recent trend of storage builds well above historical norms.
A Reuters poll of 27 traders and analysts revealed an average 33 Bcf with a range of 18 Bcf to 48 Bcf. IAF Advisors of Houston is looking for an increase of 35 Bcf and industry consultant Bentek Energy calculates a build of 34 Bcf.
Evans is at the low end of the range. His model “based on recent storage flows, along with the population-weighted degree day accumulations, points to a 22 Bcf net injection for Thursday’s report, a match with the five-year average for the date. Other estimates, including some who attempt to track the physical pipeline flows, seem to be running somewhat higher, in the 30-35 Bcf area, and so we expect the consensus will run closer to that level. In general the higher the forecast injection, the greater the chance that a bearish figure has already been discounted into the price and the increased potential for either a bullish miss in the number itself or a ‘buy the news’ reaction.”
Evan’s prediction of a 22 Bcf injection for last week precedes an estimated 5 Bcf addition for the week ending Nov. 11. “With storage as forecast, the 201 Bcf year on five-year surplus from Oct. 28 would still widen somewhat to 214 Bcf as of Nov. 18, before retreating to 210 Bcf as of Nov. 25. Overall we would rate the storage outlook as neutral to bearish, a minor net increase in the storage surplus over a four-week period. The case for a more significant price recovery to perhaps the $4.50 level over the next month or two continues to rest on the seasonal step up to a significantly higher demand level and at least some periods of colder-than-normal temperatures along the way.”
Don’t look for colder-than-normal temperatures any time soon, at least not in the East and Midwest. Near-term weather patterns still are calling for eastern warmth, but cooler temperatures appear to be on the way for the West. MDA EarthSat in its six- to 10-day outlook predicts above- to much-above-normal temperatures east of a broad arc that extends from Wisconsin to South Texas. A cold air mass is forecast to work its way from western Canada south.
“The differences in this period were tied mostly to timing, with no significant larger-scale changes,” the forecaster said. “The start of the period is expected to be warmest from the Midwest to East, where much-above to even strong above-normal temps are likely in advance of a storm system. An increase in ridging across the upper latitudes should help force a stronger cold air mass into Western Canada by mid to late period, when strong ‘belows’ should make an appearance. The ongoing -PNA [Pacific North American pattern] /+EPO [Eastern Pacific Oscillation] combo will make it difficult for the core of the cold to make much headway into the South or East, however.”
Market technicians saw a glimmer of hope for the bulls following December’s 5-cent advance Tuesday, and Wednesday’s decline still held important support levels. “With a bullish piercing pattern on the daily candlestick chart after a nice bounce off $3.650 (0.618), the case for bottoming action is gaining traction once again,” said Brian LaRose, an analyst with United-ICAP, following Tuesday’s gains. The bulls, however, have a lot of work to do. “[F]or it to continue gaining traction, key resistance must now be exceeded. See $3.908 and 4.030 as the hurdles to breach. Clear these levels and we will have confirmation that $3.446 completed the leg down from $4.983.”
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