Fundamental and Technical Analysis
Small decrease of 34B ft3 for US natural gas inventories continues to weigh on the market as it emphasizes the oversupply: After natural gas reached a historical high and with the weather in the US being warmer than normal this winter, natural gas was never the same again. Seasonal demand should easily cause natural gas prices to command a premium; however, with the current state of things, it is actually commanding a discount during winter. This has resulted in a distortion to the forward curve for Natural gas, sending prices into contango for 2016. Historically, a backwardation should be seen after the Feb’16 contracts which will be reflecting the reduced demand for natural gas after winter months. However, the extent of oversupply is so strong that markets are not displaying this.
Prices dropped again yesterday by slightly more than 1%. The main cause of this should have come from the increasing US Dollar Index which has crossed the 99 level. This has dragged over the Asian hours which are causing both WTI and Brent to remain weak. However, without much expected data to be released today, we highly expect both WTI and Brent to find support at current levels. That being said, we would think that supports for both WTI and Brent Feb’16 would be at $35.96 and $36.75. This level maybe tested, however, for it to end off this week below this level should be unlikely. Even in the weeks to come, we continue to believe that prices are near the bottom and should either hover at this range or rebound slightly.
Spreads remain narrowed as the near term possibility of removing the US oil export ban remains strong. Although this may not cause a reversal in crude prices, it would certainly close the gap between WTI and Brent, thus, bringing some premium back to WTI prices compared to Brent. This also means that for the first time in awhile, we could be seeing WTI being more expensive than Brent. We would think that this should bring the WTI-Brent spread towards $1 should the ban get lifted.
Similar to crude oil, US natural gas is also finding itself in oversupply which results in prices being hammered. Yesterday’s movements was also a result of this as inventories decrease by only 34Bft3. We believe that for natural gas to increase for this winter, we would need inventories to decrease below 2012 levels. The current difference between 2012 and now is 122B ft3 which also means that next week’s decline has to be at 194B ft3 before any substantial recovery to gas prices could happen. Considering the warmer winter, this is going to be difficult to achieve which also means that it is very unlikely for natural gas prices to even increase. (Read Report)
Source : Phillip Futures Pte Ltd