Energy Prospectus

Working gas in storage was 2,941 Bcf as of Friday, August 2, 2013, according to EIA estimates. This represents a net increase of 96 Bcf from the previous week. Stocks were 297 Bcf less than last year at this time and 20 Bcf above the 5-year average of 2,921 Bcf.

This is bearish for natural gas BUT read the next post before you panic.

By Dominick Chirichella - Thu 08 Aug 2013 11:47:56 CT (Dominick is an oil & gas analyst that writes for CME group)

The market reacted strongly to the downside immediately after the release of what many thought was a huge miss to the upside in this week's inventory injection. However, the EIA reclassified its base gas as it normally does about once a year. Reclassifications from base gas to working gas resulted in increasing working gas stocks approximately 14 Bcf for the week ending August 2, 2013, in the West Region. These reclassifications had the effect of increasing the implied net change from 9 Bcf to 23 Bcf in the West region, and from 82 Bcf to 96 Bcf in the Lower 48 states for the week ending August 2, 2013.

The 96 BCF injections would have been 82 BCF build prior to the reclassification. Although the 82 BCF injection is not as bearish as the headline 96 BCF number it was still greater than last year and the five year average as well as the market consensus which was looking for a 77 BCF injection.

As of this writing the market is trading either side of unchanged for the session (so far) as it appears that there is some light covering taking place. Overall I have not changed my view of the market based on the reclassification as the going forward period is likely to continue to see weekly injections above normal as the short term weather forecasts remains biased to the bearish side.

The latest NOAA six to ten day and eight to fourteen day forecasts continue to suggest that the call on weather related Nat Gas demand is likely to remain below normal for this time of the year. About one-third of the US (highly populated eastern region) is expected to experience colder than normal temperatures well into the third week of August with the west and Deep South expecting above normal temperatures. Overall the call on Nat Gas for power generation should continue to be lower than normal and thus the weekly inventory injections should outperform during the aforementioned timeframe.

From a technical perspective the market remains within the boundaries of the $3.20/mmbtu to $3.41/mmbtu trading range that has now been in play for the last six trading session. On an intraday basis the spot Nymex Nat Gas contract did in fact breach the lower support level and actually trade down to the $3.129/mmbtu level or just a few cents above the next key technical support level. At the moment I do not see anything that suggests this is the beginning of an upside rally in Nat Gas prices rather I view this a resting area as the market digests today's fundamental data.

Thursday's EIA report was bearish versus the market consensus and versus the so called normal five year average and compared to last year. The report showed a net injection that was above the market consensus (82 versus 77 on a pre-reclassification basis), greater than last year and above the five year average net injection for the same period. The 96 BCF injection (above normal for this time of the year) was about 19 BCF above the market consensus (on a post reclassification basis) calling for an injection of around 77 BCF. The build of 96 BCF was above my model forecast (65 BCF injection) this week.

The spot Nat Gas futures contract has been trading either side of unchanged throughout Friday's session. So far the market is holding onto the gains from yesterday's post inventory report short covering rally. The spot contract remains within the boundaries of the $3.20/mmbtu to $3.41/mmbtu trading range that has now been in play for last seven trading sessions.

Shortly after the weekly inventory report was released the market sold off strongly, breached the range resistance and almost traded down to the next technical support level. Almost as quickly… the market rebounded and reversed quickly to the upside. It was technical reversal day with the market making a new low only to close very close to the highs of the day. Yesterday's trading action was technical supportive and likely the reason why the market has been able to add to yesterday's gains (so far).

From a fundamental perspective the market remains biased to the bearish side as the latest NOAA six to ten day and eight to fourteen day forecasts are still calling for a large portion of the US to experience below normal temperatures through the third week of August. Going forward the weekly inventory injections are very likely to outperform both last year and the five year average. The current inventory level is now above the so called normal or five year average with the surplus likely to grow over the next several weeks at least. In addition the deficit in inventory compared to last year is expected to narrow as long as the weather remains biased to the bearish side.