NATURAL GAS REPORT 03.11.2004

Key Technical Reversal as Market Breaks Resistance amid Negative Storage Update

Technical Outlook
Our last technical report was on February 5th before vacation. In that report I stated the market was characterized by core weakness that now had strong selling resistance from the lower high at 5.60, and to expect attempts to probe lower to 5.10 before short covering and value buyers step in to stem the decline. Since that report, now over a month later the market has basically been contained to a rather dull range between these two key levels of 5.10 and 5.60. However, over this month layered value and lower support has been established at 5.03 to 5.10 with key lower highs set earlier at 5.20 and then today at 5.30 with a key reversal to positive momentum and a new monthly high at 5.64. Today’s new month high close is the first since early January and has turned the majority of daily technicals higher, signaling a bullish reversal. Technical signals indicate a shift from aggressive resistance selling to more short evacuation and heavier support buying. The weekly indicators show a decisive momentum build to the upside as a large move seems to be in progress. Looking ahead expect near term to challenge the 5.75 to 5.80 price, with an outside thrust to 5.92 near term if momentum can manage a close over the key 5.80 level over the next 5 sessions. Look for support to hold at 5.40 scaled down to 5.30. Only a breaking momentum reversal back below 5.30 on close negates the bullish pattern and returns the market to neutral range trade between 5.12 and 5.55.

Fundamental Supply Update
Today the EIA reported a meager inventory withdrawal of only 28 BCFs which was well below pre-release estimates by both Bloomberg and Dow Jones that were averaging 41 and 42 BCFs respectively. This now leaves storage at 1143 BCFs as of March 5th, and is 407 BCFs higher than last year and 103 BCFs below the 5 year average of 1246 BCFs. The end of winter and the resulting supply concerns peaked in December during the February futures, and in my opinion are fully factored in as far as the ending stock figure declared in April is concerned. That is why the initial weakness of the data released today was quickly replaced at the 5.30 low with buyers who’s attention quickly turned to the strength in crude and alternate liquid fuels, led by gasoline in a product led energy rally that was definitive to say the least! Also worth noting was what I feel is the beginnings of concern over inventory levels ahead, that while well above last year, are still under the 5 year average and that is unsettling to many with the prospect of expected record utility usage ahead in summer due to a booming housing market and industrial recovery as GDP growth levels out above 4%. The unknown of how severe this year’s summer heat transpires seems to be more daunting to the bears from the 5.00 level than the bulls, as praying for a repeat of last year’s mild summer seems an uncomfortable premise from which to sell. To rest on an apparent current supply cushion ahead of a demand cycle can be quite costly as the industry learned in a graphically dramatic way in the winter of 2002 when in February, 03 all time new highs were set hitting 11.89 on access! Whether we end in April with 950 BCFs or 1050 is almost moot at this point, but what is a viable concern is the rate at which storage can rebuild in the early stages as utilities begin supplying the biggest housing boom from the lowest sustained interest rate in almost 50 years! The EPA’s influenced legislation in recent years favoring gas usage both in housing and power generation will no doubt test gas reserves and return focus to the culpability of production during peak usage this summer. It will be interesting to see if the increased LNG imported as well as demand destruction from sustained prices averaging between 4.75-5.00 for well over a year, can help alleviate some of the strain against a labored and precarious production that is running almost at maximum capacity to compensate for a noticeable well depletion rate. My feelings are that the cushion of supply in reserve is little comfort if summer brings normal to above normal temperatures for any sustained period this year to the key Midwest and eastern U.S. Let’s take a closer look at the near term weather as any late winter cold could further drain supply down at a critical time…top

WSI Weather Outlook (covering Sunday, March 14 through Saturday, March 20)

Look for this week's pattern to feature significant differences from what we saw last week, especially in the western U.S. A strong upper-level ridge dominated the West Coast and Southwest last week allowing unseasonable warmth to build over these regions of the country. However, the ridge will begin weakening early this week, so look for the warm spell to come to an end over the next few days. The absence of this ridge should also allow mild Pacific air to gradually spread eastward across the entire nation, so below-normal temperatures in the eastern half of the country will be swept away.

The week should at least begin with dry and warm conditions in most of the West, except for the Northwest, where it will be more unsettled. Rainy periods, and snow in the higher terrain, will occur across the northwestern U.S. for most of the week. Daytime highs will drop back into the 40s and 50s, except for typically colder temperatures in the Cascades. The southwestern U.S. meanwhile should remain dry, but at least the heat will ease a little. Daytime highs will return to the 70s and low 80s in the deserts by mid-late week, with 60s to low 70s along the California coast.

However, the most active weather during this week will occur in the eastern and central U.S. A low pressure system will quickly head from the Plains to the Eastern Seaboard spreading showers and thunderstorms out ahead of it. While many areas will have the chance to receive locally heavy downpours, potent thunderstorms could also be found in the lower Mississippi Valley and other portions of the Deep South as a strong southerly flow taps considerable moisture from the Gulf of Mexico. If there's any snow with this system, it will most likely fall across the Great Lakes on the backside of this storm, but the system's track will cause the great majority of the precipitation to fall as rain.

As for temperatures across the eastern two-thirds of the country, expect one more quick surge of cold air to dive through the central U.S. on the heels of the aforementioned storm early next week. Otherwise, milder Pacific air will eventually become the rule. In fact, some of the very warm temperatures in the Southwest may shoot into the central U.S. around the middle of this week. Daytime highs in the 60s and 70s will be common in the southern Plains and Deep South, with 40s and 50s in the northern Plains to Midwest. Daily max temperatures in the 50s to 60s could reach the Eastern Seaboard by the end of the week.

Conclusion
Technicals made a key reversal today of almost 34 cents from low to high and closed above key resistance on the highest price since early January. This is indicating a near-term low at 5.03 is in place from February 24th and now the bull wants to march higher. Look for a near-term test of 5.72-5.75, and if crude and the products continue to probe the new high frontier which also seems likely due to the world climate, then sympathy trade may impulse a run to 5.92 to 5.98 following an important close above 5.79. Technicals are strong and the weather and inventory levels will have a diminished effect going forward barring a late cold snap that puts a sudden increased draw on supply, otherwise ending stocks are almost fully factored in. From these levels price will be more sensitive than normal to crude and liquid fuels on any sudden corrections in those markets, in my view. Look for pullbacks to be well bought as a dip back to 5.40 may only precede a rally to new highs. Only a full momentum reversal with a break down close back below 5.28 negates the advance to return to range bound neutral trade.

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