US NATURAL GAS: THE WINTER INVENTORY DRAWING BOARD © Leo Haviland October 1, 2012

Having established a major low at 190 on 4/19/12 (NYMEX nearest futures continuation), natural gas marched sharply higher, reaching significant resistance around 330 (7/31/12). After retreating to 258 (8/29/12), the marketplace renewed its assault on the 330 barrier in late September. Even if prices lose some ground in the near term, and assuming normal weather, a decisive advance above that level, and to at least major resistance hovering at 380 to 415, probably will occur in the next few months. It would not be surprising if the initial assault on 380/415 occurred relatively soon.

But why will prices keep climbing? Admittedly, bears have good arguments. For example, current United States natural gas inventories (9/21/12 stocks of 3576bcf) are up about nine percent year-on-year. Suppose weather is around average for the 2012-2013 winter draw season. An initial review of United States natural gas inventories from a days coverage perspective indicates oversupply for the upcoming draw season.

However, there arguably is less oversupply in the near term than many believe. There seems to have been an upward shift in desired stockholdings from the days coverage vantage point in recent years.

In addition, inventories during winter and at end season 2012-13 probably will be far less excessive than during the preceding draw season. This will tend to excite many bulls.

For the next few months, natural gas production growth appears to be flattening (compare calendar 2012 with 2013). But gas demand increases, assuming sustained higher prices over 330, and maybe a bit cheaper, also may level off.

Yet it seems that natural gas is “looking forward” over a longer horizon than just the next few months (or maybe even calendar 2013). A bullish aura underpinning natural gas “for the long run” derives significantly from the coal plant retirement story (especially in 2014 and thereafter). This enthusiasm (though it may eventually confront supply jumps) thus thereby assists to some extent the bullish near term price trends. Also, nuclear power supplies probably will not increase much anytime soon; some players question how much and how quickly renewable supply will blossom from here.

This longer run bullish natural gas faith (orientation) has an implication for the probable willingness of natural gas producers to short hedge, say at around 380/415, or even 450 and beyond (strategies surely differ for each calendar year). Short hedging at these levels probably will be less than many believe.

What about LNG? The extent of LNG exports is conjectural. However, at quite low prices (picture under 200, maybe even 250), the export appeal rises. Though these floors are much beneath current prices, this story tends to support the upward price bias established in April 2012.

Add a technical bull point from the timing perspective. Many key natural gas (NYMEX nearest futures) marketplace bottoms have been reached in late August and calendar September. This did not occur in calendar 2012, which argues that the new highs being made recently will be surpassed. Also, the minor low around 258 in late August, although not close to the April 2012 depth, nevertheless occurred at a time from which prices often have sprung higher. Thus the quick travel higher of the past several weeks argues for a further upward flight.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Natural Gas- the Winter Inventory Drawing Board (10-1-12)