No Bull, Natgas Looking Slightly Bullish

Following are the highpoints of natural gas market price trends and fundamentals.

Price Action:   Last week prices continued on the recent trend lower with the market forging new multi-years lows to close the week. Prices slipped 10.8 cents (5.2%) to $1.981 on a 16.7 cent range. It was the lowest close for a front month natural gas contract since January 28, 2002.

Price Outlook: Although the last two weekly storage reports in March indicated a loosening in the temperature adjusted supply/demand balance (explained in Upside Down Gas Market), this week’s report returned to a very bullish temperature adjusted situation.  If the supply/demand balance revealed in this week’s storage report remains in place, storage capacity issues should not present a problem in late October or November. However, with an 880 BCF storage surplus, there is little room for any bearish shift in overall fundamental factors. A mild summer and subsequent reduction in cooling demand, for instance, would place storage capacity under pressure. At the same time, natural gas has little room to lose market share to coal in the power generation sector. Storage issues may also arise if natural gas electricity generation demand begins to falter for any reason. CFTC data indicated a reduction in the newly established net long position across the entire complex. CME futures open interest reached a new record of 1.274 million contracts as of April 12. Total open interest across the complex rose to nearly 6.1 million contracts as of April 10, 2012.

Weekly Storage: US working gas storage according to EIA rose 8 BCF for the week ending April 6. Current inventory levels of 2,487 BCF now rise 880 BCF (54.8%) above last year while surpassing the 5 year average by 914 BCF (58.1%). This report was accompanied by a reclassification of 10 BCF to base gas.  Thus total gas storage increased 18 BCF, but only 8 BCF was added to working gas, the volume that is deliverable to customers. Canadian storage levels are also considered bearish with inventories still at 70% of capacity.

Storage Outlook: There is not storage capacity to maintain an 880 BCF surplus through November.  Therefore, due to shear capacity limitations, this storage surplus will be reduced by the end of the storage injection season.

Supply Trends: Total supply rose 0.1 BCF/D to 68.1 BCF/D. Increased Canadian imports and lower Mexican exports offset declines in LNG imports and US production. The US Baker Hughes total rig count slipped as both oil and natural gas activity was reduced. Combined with the seasonal fall in Canadian rigs, the total North American rig count fell 52 to 2,114. The total North American rig count now stands 175 higher than last year. The higher efficiency horizontal rig count fell 20 to 1,145, 142 higher year-on-year.

Demand Trends: Total demand increased 1.3 BCF/D to 64.9 BCF/D as all sectors reported a small rise. Electricity demand rose 688 gigawatt-hrs to 69,338 which is 1,068 (1.5%) below last year and 416 (0.6%) behind the 5 year average. Above normal temperatures will not lift total demand until late May or even June on a national basis.

Other Factors: Equity markets had a rough week as numerous issues caused stock market prices to fall.

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