Natural Gas - July 29
Posted: Sun Jul 29, 2012 1:12 pm
Nat Gas futures finally came off of its highs declining on the week on an injection number that came in right at the consensus level. The September Nat Gas futures contract decreased by 1.98% or $0.061/mmbtu on the week but is still trading above the key psychological level of $3.00/mmbtu.
Nat Gas prices are under pressure on expiration day for the August Nymex futures contract and after a weekly injection report that came in at the market consensus level. The most interesting fact is the market has been holding above the $3/mmbtu level once again. For the moment it seems to be the line in the sand for this market and if it holds today we could potentially see a bit of a jump in prices next week. The latest NOAA six to ten day and eight to fourteen day temperature forecasts are marginally more supportive than the forecasts from earlier in the week insofar as the area of the country that is expecting to experience above normal temperatures. The current forecast is showing above normal temperatures for most of the US with the exception of the west coast which is expecting below normal temperatures. Cooling demand will remain a positive for Nat Gas for the next several weeks.
On the nuclear front the level of outages this year continues to exceed both last year and the five year average and the gap is widening a tad. Currently there is 8,200 MW of nuke outages versus last year at 2,600 MW and the five year average at 4,100 MW. The combination of the call for Nat Gas to replace the lost power generation from nuclear along with warmer than normal temperatures should result in a modest increase in Nat Gas consumption over the next several weeks.
The main negative looming over the Nat Gas market remains the economic favorability of coal over Nat Gas. With prices at current levels the economics are positive for coal and have been for most of the last three weeks of trading. Some utilities have switched back to coal as I discussed yesterday and with the forward curve still in a modest contango through February the likelihood of the economics moving back to being favorable for Nat Gas is getting lower every day. As has been the debate for the last several weeks... will cooling demand and nuke outages being enough to offset the loss of coal switching demand and thus result in injection underperforming for the rest of the injection season. At the moment the market sentiment suggests that this market may still have room to go higher.
Overall I still view Nat Gas futures prices as overvalued versus the current fundamentals. There is still an exposure of the industry prematurely hitting maximum storage capacity especially if some of the increases in demand do start to recede as describes above. Also do not lose sight of the simple fact that even if the industry does not prematurely hit storage limitations there will be a record amount of Nat Gas in storage prior to the start of the upcoming winter heating season. there will not be a shortage or supply related issues anytime soon ...barring some unforeseen tropical activity in the US Gulf of Mexico.
Nat Gas prices are under pressure on expiration day for the August Nymex futures contract and after a weekly injection report that came in at the market consensus level. The most interesting fact is the market has been holding above the $3/mmbtu level once again. For the moment it seems to be the line in the sand for this market and if it holds today we could potentially see a bit of a jump in prices next week. The latest NOAA six to ten day and eight to fourteen day temperature forecasts are marginally more supportive than the forecasts from earlier in the week insofar as the area of the country that is expecting to experience above normal temperatures. The current forecast is showing above normal temperatures for most of the US with the exception of the west coast which is expecting below normal temperatures. Cooling demand will remain a positive for Nat Gas for the next several weeks.
On the nuclear front the level of outages this year continues to exceed both last year and the five year average and the gap is widening a tad. Currently there is 8,200 MW of nuke outages versus last year at 2,600 MW and the five year average at 4,100 MW. The combination of the call for Nat Gas to replace the lost power generation from nuclear along with warmer than normal temperatures should result in a modest increase in Nat Gas consumption over the next several weeks.
The main negative looming over the Nat Gas market remains the economic favorability of coal over Nat Gas. With prices at current levels the economics are positive for coal and have been for most of the last three weeks of trading. Some utilities have switched back to coal as I discussed yesterday and with the forward curve still in a modest contango through February the likelihood of the economics moving back to being favorable for Nat Gas is getting lower every day. As has been the debate for the last several weeks... will cooling demand and nuke outages being enough to offset the loss of coal switching demand and thus result in injection underperforming for the rest of the injection season. At the moment the market sentiment suggests that this market may still have room to go higher.
Overall I still view Nat Gas futures prices as overvalued versus the current fundamentals. There is still an exposure of the industry prematurely hitting maximum storage capacity especially if some of the increases in demand do start to recede as describes above. Also do not lose sight of the simple fact that even if the industry does not prematurely hit storage limitations there will be a record amount of Nat Gas in storage prior to the start of the upcoming winter heating season. there will not be a shortage or supply related issues anytime soon ...barring some unforeseen tropical activity in the US Gulf of Mexico.