Warmer Temperature Outlook and Record Net Long Position Imply Sell Off Likely

Highlights of the Natural Gas Summary and Outlook for March 29, 2013 follow. The full report is available at the link below.

Natural Gas Summary and Outlook

• Price Action: Prices basis the now prompt May contract rose 7.2 cents (1.8%) to $4.024 on a 23.6 cent range.
• Price Outlook: The market has now risen 6 weeks in a row. While this is not extreme for natural gas, it is certainly extended. The slight bias to a new low last week obviously did not occur, but now with demonstrably warmer temperatures, the bias for a new low rather than a continued advance is beginning to increase. The market has an increasingly bullish sentiment that was fundamentally supported and justified by temperature patterns. However, there is now increasing evidence of temperature adjusted demand loss. Absolute demand levels remain elevated due to the temperatures, but the underlying support appears to be deteriorating. The rise in speculative net length continued and has reached 11 weeks. Since this string began, the net long speculative position has more than tripled. At the same time, CME futures open interest is rising with a record number of consecutive increases that surpasses streaks established in 2001 and 2008. Total open interest fell to 5.26 million as of March 26, which is well below the record open interest of 6.36 million and leaves the net long position as a percentage of open interest incredibly elevated. With speculative net length now in nosebleed territory, if this length looks to exit at the same time, the price drop may be very sharp and significant.
• Weekly Storage: US working gas storage fell 95 BCF for the week ending March 15. Current inventory levels of 1,781 BCF now fall 649 BCF (26.7%) below last year while surpassing the 5 year average by 59 BCF (3.4%).
• Storage Outlook: Unlike last week where 4 BCF of Producing Region base gas was reclassified, there was nothing to note. End of March levels will still be near the 2nd highest on record, coming in very near 2006, which previously held the high record before last year’s almost unbelievable levels.
• Supply Trends: Total supply was up 0.3 BCF/D at 67.9 BCF/D. Higher US production and Canadian imports more than offset rising Mexican exports. Although the most recent EIA monthly data has US January production down, this was due to both maintenance and temperature related freeze-offs. With increasing production in areas subject to cold temperatures, significant cold snaps are increasingly bullish as demand soars at the same time supply is limited. The US Baker Hughes rig count rose 2 to 1,748 with oil activity surging and natural gas plunging. Canadian activity fell substantially, a normal seasonal occurrence. Thus the total North American rig count decreased by 89 to 1,994, which now trails last year by 241. The higher efficiency US horizontal rig count fell 1 and at 1,099 falls 81 behind last year.
• Demand Trends: Total demand rose 6.5 BCF/D to 80.5 BCF/D. All sectors were higher with the R&C sector up the most. Electricity demand rose 1,805 gigawatt-hrs to 73,145, which exceeds last year by 4,591 (6.7%) and the 5 year average by 3,436 (4.9%). There is increasing evidence of temperature adjusted demand loss and April flows will be very interesting with baseload gas near the $4 mark.
• Other Factors: The S&P 500 resumed its 2013 trend and is in record territory.