Natural Gas - Short term Outlook

Natural gas futures traded up for the third consecutive month gained almost 4% on strong physical winter seasonal demand settled at $4.180 for the month November 2010. The cooler temperature forecasts from the starting of the month kept momentum in natural gas prices as traders and spot buyers rush to lock profits before winter demand accelerate. The positive signal for natural gas prices came after EIA reported decline in last released weekly inventory report indicating strong physical demand which helped prices to continue the bull ride with strong spot prices.

Total Working gas in storage was 3837 Bcf as of Friday, November 19, 2010, according to EIA report. Stocks were 2 Bcf higher than last year at this time and 334 Bcf, 9.50% above the 5-year average of 3503 Bcf. In the East Region, stocks were 74 Bcf above the 5-year average while stocks in the producing region were 217 Bcf above the 5-year average of 1032 Bcf. The increased drilling activities on shale gas discoveries have increased production resulting in higher storage levels. At 3837 Bcf, total working gas is above the 5-year historical range. Working natural gas in storage set another new all-time record increasing to 3,843 Bcf as of Friday, November 12.

The total world natural gas consumption is expected to increase by 1.60% to 111.5 Tcf/day for 2010. Total natural gas consumption in US is expected to rise by 4% to 65 Bcf/d in 2010. The industrial and power generation sectors are the major contributor for the growth of natural gas consumption in 2010. Projected consumption of natural gas for power generation grows by nearly 1.3 Bcf/d to 20.2 Bcf/d in 2010 while the projected use of natural gas in the industrial sector also grows by 6.4%, from 16.8 Bcf/d in 2009 to 17.9 Bcf/d in 2010. The increased dependability on natural gas to reduce greenhouse gases compare to other alternatives will boost natural gas consumption resulting in increasing in prices.

EIA expects total marketed natural gas production to increase by 2.50% in 2010 and decline by 1.20% in 2011. Natural gas production grew steadily for the first half of the year on increased shale gas drilling activities. The total number of working natural gas rigs fell 4% to 955 from 992 in August 2010. A total of 7.9 Bcf of natural gas production was shut in because of hurricanes during June, July, and August.

Natural gas spot prices reported increase throughout the month November on cooler temperatures. Residential and commercial consumption increased approximately 7.6% in the last week of the month on strong heating space demand. About 52% of U.S. households use natural gas for heating. The whole sale natural gas prices at the bench mark Henry Hub delivery point rose more than 24% during the on higher demand to $4.17 from $3.35 of previous month. EIA expects the annual average natural gas Henry Hub spot price for 2011 to be $4.31 per Mcf reporting decline against prior forecast.

NYMEX Natural Gas Seasonally Map (Source: Bloomberg)

 

The above seasonality chart shows a significant price rise during the month of December. Natural gas prices at current point are in correction face on lack of significant winter demand and higher storage levels. However the below normal temperatures and snowfall in Europe will boost demand followed by US winter demand resulting in higher prices for December 2010. We expect natural gas prices to trade higher with gradual increase in spot demand and lower inventory levels. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. Buying on dips in natural gas with important resistance at $5.30 with support at $3.60 is recommended.

Short Term Outlook - Crude oil & Natural Gas

Crude oil

Crude oil futures edged up ended more than 4% higher for October 2010 settled at $ 81.43. Crude oil prices traded in its known range of $75-$85 providing intraday traders to churn good profits with balanced economic data and ample supplies in product market. Oil prices traded in well mannered and remain fluctuated near $81 for the whole month on dollar fluctuations, mixed economic data and high inventory pressure.

The weaker dollar boost oil prices from the beginning of the month lifting above $80 on concerns over the second round of Quantitative Easing and stronger Euro. The increased import from China and positive economic data provide strength to oil prices to trade near $83. The record inventories in oil and product market on lower heating demand pressured oil prices to trade down near $81 for the remaining of the month discount to the ICE Brent.

World oil demand supply balance is stabilizing with gradual economic recovery and increased demand for Non-OECD countries especially from China and India. The world oil demand is expected to rise to 86.37 mb/day in the fourth quarter of 2010 and 87.44 mb/day in 2011 while supplies to remain short to demand and expected to rise to 86.29 mb/d and 87.21 mb/d for 2010Q4 and 2011 respectively.

The stabilized economic recovery and increase in oil consumption was mostly supported by Govt aid and physical stimulus. However the emerging market counties have played significant role to balance the oil market with increased consumption. China’s economy has pushed the country’s oil demand up by more than 5.6%, which is almost half of total world oil demand growth. The consumption from India is expected to increase further with steady economic growth and increased new car registration which will boost demand for gasoline and diesel. Developing Countries’ oil demand growth is forecast to average 26.6 mb/d in 2010.

The moderate US driving season and neutral hurricane season has put huge pressure on crude oil and product inventories. Petroleum supplies are at the highest level in records since 20 years. Overall petroleum stockpiles including Crude oil and its climbed 8.92 mb to 1.14 billion, the highest level since at least 1990. The OECD industry stocks are at 61 days of forward cover levels above the 60 days of forward cover which reflects very bearish picture for crude oil market. However, the overhang in stocks, the high level of spare refining capacity and the floating storage is expected to remain unchanged for short term and will offset by increased oil demand.

The hurricane season so far has not affected the oil prices much compare to avg intense hurricane season. The hurricane season 2010 has generated 9 hurricanes and 10 tropical storms out of total 19 cyclone formations till date in Gulf of Mexico leaving oil and natural gas producing regions unaffected. The November season is not expected to generate much strong which may put pressure on oil prices for short term.

The prevailing economic uncertainty in world market and current situation in oil market is complicating the short term trend of crude oil prices. However the second round of QE will boost oil prices to trade near $90 but record storage will limit upside. OPEC has agreed to provide needed action to keep oil prices stable in case of dramatic hike. We expect oil prices to trade up in first half of November 2010 and than expected to remain stable with important resistance at $87 and with crucial support at $74.

Natural Gas

Natural gas futures rallied more than 6% gained for the second consecutive month settled at $4.04 for the month October 2010. The ample supplies and normal weather condition pressure natural gas prices to trade lower near $3.20 for the first three weeks of the month. The neutral hurricane season and lack of tropical storms also pressure prices as speculative positions declined on sufficient supplies. Natural gas prices got hit after NYMEX November contract expired in premium on wide contago backed by EIA inventory data showing lesser than expected storage build in spot market which lift natural gas prices above $4 in the end of the month.

Total Working gas in storage was 3754 Bcf as of Friday, October 22, 2010, according to EIA report. Stocks were 1 Bcf less than last year at this time and 312 Bcf, 9.10% above the 5-year average of 3442 Bcf. In the East Region, stocks were 69 Bcf above the 5-year average while stocks in the producing region were 193 Bcf above the 5-year average of 999 Bcf. The increased drilling activities on shale gas discoveries have put huge pressure on spot prices resulting in higher storage levels. At 3754 Bcf, total working gas is within the 5-year historical range. Inventories reached a record 3.837 trillion cubic feet last November.

The total world natural gas consumption is expected to increase by 1.60% to 111.5 Tcf/day for 2010. Total natural gas consumption in US is expected to rise by 4% to 65 Bcf/d in 2010. Projected consumption of natural gas for power generation grows by nearly 1.3 Bcf/d to 20.2 Bcf/d in 2010. The projected use of natural gas in the industrial sector also grows significantly in 2010, gaining by 6.4%, from 16.8 Bcf/d in 2009 to 17.9 Bcf/d in 2010. The increased dependability on natural gas to reduce greenhouse gases compare to other alternatives will boost natural gas consumption resulting in increasing in prices.

U.S. gas production rose 1.6% in August as output from wells in the Gulf of Mexico and Louisiana increased. Output increased to 72.38 bcf from a revised figure of 71.27 bcf in July 2010. EIA expects total marketed natural gas production to decline by 1.50% in 2011. Natural gas production grew steadily for the first half of the year on increased shale gas drilling activities. The total number of working natural gas rigs increased to 967 from 751 in December 2009 due to higher prices. A total of 7.9 Bcf of natural gas production was shut in because of hurricanes during June, July, and August. Based on the latest NOAA hurricane forecast, the production shut include 66.3 Bcf during the final 3 months of the hurricane season.

Natural gas spot prices increase in the end days of the month October 2010 on cooler temperatures. Residential and commercial consumption, increased approximately 2.2 Bcf per day in the last week of the month as cooler temperatures entered the northern parts of the country. About 52% of U.S. households use natural gas for heating. However whole sale natural gas prices at the bench mark Henry Hub delivery point fell almost 13% on lower demand for the throughout the month near $3.35 from $3.86 of previous month. EIA expects the annual average natural gas Henry Hub spot price for 2011 to be $4.58 per Mcf reporting decline against prior forecast.

The hurricane season is about to end and which has not affected much to the producing region so far on lack of stronger storms. The demand for natural gas will remain low for the short term until cold waves knock on the doors. However the forecasts for cooler weather have started and below-average temperatures are expected along the U.S. East Coast and parts of the Gulf of Mexico coast from Nov. 3 through Nov. 7, according to Commodity Weather Group. The stockiest will buy natural gas now before real demand get rise to take price advantage. 

NYMEX Natural Gas

We expect natural gas prices to trade higher after a correction in the first half of the month discounting the premium to the November expiry supported by increased cooling demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. We recommend buying on dips in natural gas with important resistance at $5.10 with support at $3.10.

 

Short Term Outlook - Crude oil & Natural Gas

Crude oil

Crude oil futures rallied more than 8% for the month September 2010 settled at $79.97. The upper side move in oil prices was mainly contributed by positive investment sentiment backed by convincing economic data from US, EU and China and strong world equity indices. The record supplies in the oil market pressured oil prices to trade down but failed to sustain as investors grabbed the every down side as an investment opportunity considering the best place to park their funds after Gold hit all time high and crossed $1300.

The month September witnessed a bull run for all commodities where silver outperformed to base metals and crude oil. Gold prices traded steadied and corrected after crossing the psychological level of $1300, almost 4% up for the month providing investors an opportunity to book profit and invest in relatively cheap commodity in Energy & Metals Complex. Crude oil prices for the year 2010 so far have traded lower compare to base metals and world equity indices. With increased industrial activities and positive economic outlook the long term trend for oil prices seems bullish with tremendous funds flows.

The industrial activities have reported sustainable growth for 2010 backed by timely executed stimulus packages and financial aid. The manufacturing activities in US increased by 2.55% for 2010 and 7.44% on YoY basis while manufacturing activities in Euro Zone rose by 3.88% for the year. The industrial production in US rose by 4.46% and 13.9% in China while Japan reported 15.4% growth with decline in manufacturing activities. The industrial demand for crude oil will peak by 2011 with sustainable economic growth backed by huge demand from emerging markets.

In 2010, global consumption is projected to grow by 1.05 mb/d, up by 0.1 mb\d from the previous forecast. All the expected growth in oil demand this year is projected to come from the non-OECD region led by Asia. The demand from China is expected to grow by 5.60% while oil demand from India is expected rise by 2.30%. The International Energy Agency and OPEC sees the global oil demand for 2010 at 85.95 mb/d while demand for 2011 is expected to rise by 1.5% to 87.9 mb/d.

The moderate US driving season has put huge pressure on crude oil and product inventories. Petroleum supplies are at the highest level in records since 20 years. Overall petroleum stockpiles including Crude oil and its climbed 8.92 mb to 1.14 billion, the highest level since at least 1990. The OECD industry stocks are at 61 days of forward cover levels above the 60 days of forward cover which reflects very bearish picture for crude oil market. However, the overhang in stocks, the high level of spare refining capacity and the floating storage is expected to remain unchanged for short term and will offset by increased oil demand.

Rising oil supplies will mostly offset higher demand over the next five years. The average daily global oil consumption is expected to grow by 1.2 mb each year between 2009 and 2015. The supply-demand picture would be virtually unchanged next year compared with this year, although spare capacity would begin to shrink by 2015. (IEA: Medium Term Oil & Gas Report).

The hurricane season so far has not affected the oil prices much compare to avg intense hurricane season. The hurricane season 2010 has generated 6 hurricanes and 8 tropical storms out of total 14 cyclone formations till date in Gulf of Mexico leaving oil and natural gas producing regions unaffected. The September season is expected highly intensive in GoM according to historical figures and now it is in ending phase.

However the prevailing economic uncertainty in world market and current situation in oil market is complicating the short term trend of crude oil prices. We expect oil prices to trade up in first half of October 2010 and later will continue to trade in well known average range of $70 -$80 with important resistance at $86 and with crucial support at $72.

Natural Gas

Natural gas futures edged up for the month September 2010 settled at $3.87 almost 3% higher than August 2010. Natural gas prices traded in range for the month on moderate weather and firm demand in spot market. The first half of September 2010 remained very active for natural gas players as the rush for the winter storage boosted prices above $4.00 which was also supported by bullish weekly inventory data. Price fell on second half on neutral hurricane season and profit booking form higher side which was finally slapped by bearish inventory data on last trading session of the month.

Total Working gas in storage was 3414 Bcf as of Friday, September 24, 2010, according to EIA report. Stocks were 166 Bcf less than last year at this time and 202 Bcf, 6.30% above the 5-year average of 3212 Bcf. In the East Region, stocks were 22 Bcf above the 5-year average while stocks in the producing region were 119 Bcf above the 5-year average of 931 Bcf while stocks in the West Region were 61 Bcf. The increased drilling activities on shale gas discoveries have put huge pressure on spot prices resulting in higher storage levels. At 3414 Bcf, total working gas is within the 5-year historical range.

The total world natural gas consumption is expected to increase by 1.60% to 111.5 Tcf/day for 2010. Total natural gas consumption in US is expected to rise by 4% to 65 Bcf/d in 2010. Projected consumption of natural gas for power generation grows by nearly 1.3 Bcf/d to 20.2 Bcf/d in 2010. The projected use of natural gas in the industrial sector also grows significantly in 2010, gaining by 6.4%, from 16.8 Bcf/d in 2009 to 17.9 Bcf/d in 2010. The increased dependability on natural gas to reduce greenhouse gases compare to other alternatives will boost natural gas consumption resulting in increasing in prices.

EIA expects total marketed natural gas production to increase by 1.2% to 61.2 Bcf/d in 2010. Natural gas production grew steadily for the first half of the year as the total number of working natural gas rigs increased to 967 from 751 in December 2009 due to higher prices. A total of 7.9 Bcf of natural gas production was shut in because of hurricanes during June, July, and August. Based on the latest NOAA hurricane forecast, the production shut include 66.3 Bcf during the final 3 months of the hurricane season.

Natural gas spot prices fell at the majority of market locations as moderating temperatures eased cooling demand for natural gas. Whole sale natural gas prices at the bench mark Henry Hub delivery point rose 1.84% for the month at $3.86 from $3.79 of previous month. Natural gas price at Henry Hub spot market is more than 17% higher than previous year September 2009. EIA expects the annual average natural gas Henry Hub spot price for 2011 to be $4.76 per Mcf reporting decline against prior forecast.

The demand for natural gas will remain low for the short term until cold waves knock on the doors. The stockiest will buy natural gas now before real demand get rise to take price advantage. We expect natural gas prices to trade higher after correction in the first half of the month supported by increased cooling demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. We recommend buying on dips in natural gas with important resistance at $5.10 with support at $3.10.

Crude oil - Natural Gas Monthly Outlook

Crude oil futures continued to fluctuate in its last six month range of $70 - $80 for August 2010 trading almost 9% down keeping fundamental balance on market driven forces settled at $71.92.  The record inventory storage and higher imports are the major worries for crude oil prices. Crude oil prices kept momentum in the first week of the month traded above $80 on global economic recovery expectations as strong manufacturing data flashed by China and EU countries. The downside came as slowdown signals from US Federal Reserve and EU authorities affect investment sentiments while oil demand forecasts form leading agencies set bearish sentiment for crude oil futures drifting down to $71 levels.

In 2010, global consumption is projected to grow by 1.05 mb/d, up by 0.1 mb\d from the previous forecast. All the expected growth in oil demand this year is projected to come from the non-OECD region led by Asia. Overall, most growth will come from transport and petrochemical sectors worldwide. The International Energy Agency and OPEC sees the global oil demand for 2010 at 86.6 mb/d while demand for 2011 is expected to rise by 1.5% to 87.9 mb/d.

The US driving season encouraged refiners to boost refinery runs, mainly in the US. However, combination of a well-supplied market across the globe, higher gasoline and middle distillate stocks and uncertainties about the pace of economic growth created a bearish sentiment in the oil product markets. Petroleum supplies are at the highest level in records since 20 years. Overall petroleum stockpiles including Crude oil and its climbed 8.92 mb to 1.14 billion, the highest level since at least 1990. The OECD industry stocks are at 61 days of forward cover levels above the 60 days of forward cover which signals very bearish picture for crude oil market. However, the overhang in stocks, the high level of spare refining capacity and the floating storage is expected to remain unchanged for short term.

Rising oil supplies will mostly offset higher demand over the next five years.  The average daily global oil consumption is expected to grow by 1.2 mb each year between 2009 and 2015. The supply-demand picture would be virtually unchanged next year compared with this year, although spare capacity would begin to shrink by 2015. (IEA: Medium Term Oil & Gas Report).

The ongoing hurricane season has generated 3 hurricanes out of 5 storms recorded till date in Gulf of Mexico leaving oil and natural gas producing regions unaffected. The August –September season is expected highly intensive in GoM and 8 to 9 cyclone formations are most likely which may give a push to crude oil and natural gas prices to trade up. However crude oil futures are still under pressure of deteriorated economic outlook and lower demand and we expect oil prices to trade down in first half of September 2010 and later will continue to trade in well known average range of $70 -$80 with important resistance at $84 and with crucial support at $65.

Natural gas futures fell more than 22% in August 2010 most since March 2010 traded below $3.800 on ample supplies and reduced demand due to normal weather across Atlantic Basin. The increased drilling activities on shale gas discoveries have put huge pressure on spot prices resulting in higher storage levels. Natural gas stockpiles are currently at 3.052 Tcf, 6.20% higher to the five year average levels of 2.875 Tcf.

Total Working gas in storage was 3052 Bcf as of Friday, Aug 20, 2010, according to EIA report. Stocks were 198 Bcf less than last year at this time and 177 Bcf above the 5-year average of 2,875 Bcf. In the East Region, stocks were 15 Bcf above the 5-year average while stocks in the producing region were 84 Bcf above the 5-year average of 865 Bcf after a net withdrawal of 5 Bcf. Stocks in the West Region were 78 Bcf above the 5-year average. At 3052 Bcf, total working gas is within the 5-year historical range.

EIA expects total marketed natural gas production to increase by 1.1% to 61.1 Bcf/d in 2010. Natural gas production grew steadily for the first half of the year as the total number of working natural gas rigs increased to 973 from 751 in December 2009 due to higher prices. The production forecast is revised downwards by EIA as the number of working rigs will reduce as lower natural gas prices will cap profits for drillers.

Natural gas spot prices at most markets elsewhere in the lower 48 States reported decline. Natural gas prices fell at the majority of market locations as moderating temperatures eased cooling demand for natural gas. Whole sale natural gas prices at the bench mark Henry Hub delivery point ended almost 27% down from $4.81 to $3.79 for the month August 2010. EIA expects the annual average natural gas Henry Hub spot price for 2011 to be $4.98 per Mcf on slightly decline in production compare to increased consumption.

We expect natural gas prices to trade higher after correction in the first half of the month supported by increased cooling demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. The offshore drilling moratorium is projected to reduce Gulf of Mexico production by 10 Bcf over the last 6 months of 2010 and that may add pressure to natural gas prices to trade up. The important resistance for natural gas lies at $5.20 with support at $3.10.

Commodity Monthly Outlook - Crude oil, Natural gas

Since last six months crude oil futures have fluctuated in a stable range of $68-$80 keeping fundamental balance on market driven forces. Crude oil futures ended up by more than 2% settled to closely $77. The recent development in the oil market has kept oil prices under control over huge speculation trading compare to last year.

There is a question among most energy analysts and experts that whether crude oil market is in equilibrium or not. The stable oil prices since last few months suggesting a balance in the market which may drive oil prices on any side of breakout. The point that signals the equilibrium is fragile is growing supplies and recent market uncertainties which may drag oil prices lower. However the upward breakout backed by higher demand from emerging markets and rising production cost may drive oil prices to new highs.

Rising oil supplies will mostly offset higher demand over the next five years, the International Energy Agency said on Wednesday in a report. The average daily global oil consumption is expected to grow by 1.2 mb each year between 2009 and 2015. The supply-demand picture would be virtually unchanged next year compared with this year, although spare capacity would begin to shrink by 2015. (IEA: Medium Term Oil & Gas Report).

In 2010, global consumption is projected to grow by 0.95 mb/d, slightly up from the previous forecast. All the expected growth in oil demand this year is projected to come from the non-OECD region led by Asia. Overall, most growth will come from transport and petrochemical sectors worldwide. The International Energy Agency revised up its global oil demand forecast for the 2010 on stronger-than-expected preliminary OECD data. The global oil demand growth in 2010 is now seen at +1.7 mb/d to 86.4 mb/d.

This season’s first hurricane has just showed its sign in the Gulf of Mexico. The first hurricane Alex (Cat 1) is now located about 220 miles southeast of Brownsville Texas moving westward. There is a 70% chance that three to seven major hurricanes will swirl in the Atlantic in the six months following the start of the hurricane season on June 1, according to NOAA's Climate Prediction Center.

The recent shift in sentiment, along with the growing imbalance in supply/demand fundamentals, highlights the need for an increasingly cautious approach when evaluating the market developments. This will be particularly important going forward, given the considerable uncertainties facing the market for the remainder of this year. The important resistance for crude oil lies at $80 with support at $69.


Natural gas futures managed to end up in green after grabbing the biggest monthly gain in previous month. Natural gas prices gained more than 4% settled at $4.50 for the month June 2010 on fresh buying on higher residential and industrial demand expectations. The threat from cyclone formations and hurricane Alex in Gulf of Mexico support natural gas prices to trade up despite mild weather forecasts and growing supplies.

Working gas in storage was 2,624 Bcf as of Friday, June 18, 2010, according to EIA report. Stocks were 14 Bcf less than last year at this time and 309 Bcf above the 5-year average of 2,315 Bcf. In the East Region, stocks were 87 Bcf above the 5-year average while stocks in the producing region were 130 Bcf above the 5-year average of 805 Bcf after a net injection of 16 Bcf. Stocks in the West Region were 92 Bcf above the 5-year average. At 2,624 Bcf, total working gas is within the 5-year historical range.

(Source: EIA)

EIA expects total marketed natural gas production to increase by 2.1% to 61.2 Bcf/d in 2010. Natural gas production grew steadily for the first half of the as the total number of working natural gas rigs increased to 958 from 751 in December 2009. The production forecast was revised upwards by EIA as the number of working rigs continued to increase to almost 970 during mid June 2010.

The increased production and supplies may offset for the second half by production disruption in Gulf of Mexico on intense hurricane season. The median outcome for projected total shut-in production due to tropical storms from June through November 2010 is 166 Bcf compared with an estimated 19 Bcf shut-in production last year.

Whole sale natural gas prices at the bench mark Henry Hub delivery point ended more than 8% higher from $4.31 to $4.68 for the month June 2010. The fresh buying in physical market helped spot prices to trade higher than future contract. EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $4.49 per thousand cubic feet (Mcf), followed by rise in 2011, averaging $5.06 per Mcf for the year.

We expect natural gas prices to face some correction in the first half of the month backed by some profit booking supported by warmer weather forecasts which may reduce residential demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. The important resistance for natural gas lies at $5.20 with support at $3.90.