Natural Gas Weekly Fundamental Analysis February 20-24, 2012, Forecast

Economic Events: (GMT)

WEEKLY

                               

Historical:

High      5.13 January 2011

Low        2.29 January 20, 2011

Rule:

Natural gas is sometimes said to be the queen of all commodities, with Crude Oil being king. Natural gas is nevertheless a major commodity in its own right, which is used for everything from cooking food to heating houses during the winter. Natural Gas is growing much faster than either of its non-renewable fossil fuel competitors, oil and coal.

Trading natural gas is not for the faint hearted. Even by commodities standards, natural gas is a notoriously volatile market subject to wild price fluctuations.

Do not miss the weekly U.S. gas inventories report. The figures are issued by the Energy Information Administration(EIA) every Thursday afternoon at 15:30 (released Friday at 15:30 if there was a U.S. bank holiday on Monday). Here’s a link to the latest EIA report. The main natural gas moving figure in there is the change in inventories from the previous week. When it comes to the gas inventories report, we’re talking about billions of cubic feet, Bcf for short.

When the actual change in inventories number is released, it is the deviation from the expected number that is really important. If the actual inventories figure shows a 24 Bcf rise when an 84 Bcf increase was expected, then that is actually positive for the price of natural gas. All else equal, the price of natural gas should rise after the release.

A barrel of oil has roughly 6 times the energy content of natural gas. If the fuels were perfect substitutes, oil prices would tend to be about 6 times natural gas prices. However, due to various market characteristics discussed briefly above and the ease of using oil, the price of oil has been following a pattern of 8-12 times that of natural gas. However that ratio has spiked dramatically since March 2009.

The average natural gas futures price for the upcoming winter is less than $4 per million British thermal units (MMBtu), the lowest level entering the winter since 2001-2002. The so-called “winter strip,” the average natural gas futures price for the contract months November through March as settled on the New York Mercantile Exchange (NYMEX), is a closely followed measure of market participants’ price expectations. In markets such as New England and California, where natural gas prices often set on-peak, wholesale power prices, the NYMEX winter strip for natural gas also can influence expectations for forward wholesale power prices.

Late October expectations for average winter natural gas prices have not been this low since the winter of 2001-2002. Winter price expectations, as reflected through the winter strip on NYMEX, peaked at almost $12 per MMBtu in 2005 in the aftermath of supply disruptions related to Hurricanes Katrina and Rita. Starting in 2009, late fall expectations for average winter natural gas futures prices dipped under $5 per MMBtu as domestic natural gas production from shale plays grew rapidly.

 Analysis and Recommendation:

Natural Gas is the outstanding mover of the week. For no express reason, except a drop in weekly inventory natural gas has climbed to 2.8320

Moving from a low of 2.36 a few weeks ago, natural gas has continued to surge. Weather is stable, inventories have fallen due to reduced production because of the low prices. Two weeks ago Chesapeake Energy announced the suspension of product due to high inventories, low demand and low prices.

 The EIA stated natural gas storage in the U.S. in the week ended February 10 fell by 127 billion cubic feet, after declining by 78 billion cubic feet in the preceding week. 

Inventories fell by 230 billion cubic feet in the same week a year earlier, while the five-year average change for the week is a decline of 178 billion cubic feet, according to U.S. Energy Department data.

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