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The Kansas City Federal Reserve released its December manufacturing survey in which the composite index inched up to (-)1 from (-)2 in the previous month but continued to contract.

This marked the highest reading since August 2023 improving upon the -8 in September and October.

The index is an average of production, new orders, employment, delivery time, and indexes of raw materials inventories, and includes data from Kansas, Colorado, Nebraska, Oklahoma, and Wyoming, and parts of Missouri and New Mexico.

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Source: Kansas City Fed; TradingEconomics.com

December data marked the ninth month this year that manufacturing activity saw a contraction, i.e. was below 0.

Although factory activity was flat, sentiments around new orders improved with 42% of firms expecting demand to be slightly higher in 2024 and 6% forecasting a significant increase.

22% of surveyed firms expect to see no change in demand levels.

In 2024, 32% of firms are planning to expand capital expenditures, while seasonally adjusted expectations of employment activity rebounded from (-)3 in November to +8 in the most recent data.

Expectations for the composite index over the next six months improved to +6 in December 2023 from (-)1 in November 2023, while also registering the highest since December 2022.

Much of the improvement in current measured sentiment came from a positive outlook around supply chains on improving backlogs which shifted higher from 0 to +3.

However, inflation, price fatigue, and cost of labour could remain significant challenges.

Natural gas drawdown

The US Energy Information Agency (EIA) reported that American utilities drew 87 billion cubic feet (Bcf) of natural gas out of storage in the week that ended December 15, 2023, with working gas stocks falling to 3,577 Bcf from 3,664 Bcf.         

The decline came as reports projected colder-than-average weather.

This was above market expectations of a draw of under 80 Bcf and followed a sharply lower draw in the week ending 8^th December at 55 Bcf amid warmer-than-expected temperatures.

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Source: US EIA; TradingEconomics.com

This marked the third consecutive week of storage draws equaling a combined 259 Bcf.

Total underground storage was 7.2% above the corresponding week in the previous year, and 8.5% or 280 Bcf above the five-year average of 3,297 Bcf.

The most significant week-over-week net change came from the Midwest region at (-)34 Bcf, followed by the East at (-)23 Bcf.

Prices

At the time of writing, natural gas futures traded near $2.53/ mmbtu and were up 3.3% on the day following the sharper-than-expected withdrawal.

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Source: MarketWatch; NYMEX

Generally speaking, natural gas prices have been in a downtrend due to high storage levels over the past few weeks.

The front-month contract has declined 12.7% over the past month and is down 42.8% YTD.

However, on 19th December open interest positions, i.e. the number of futures contracts held by the market at the end of the trading session reached a 27-month high of over 1.44 million contracts suggesting significant market demand.

In terms of total output, average volumes of gas are up 0.27% in December as compared to November at 108.6 Bcf.

Outlook

Manufacturing activity in the central United States contracted for a fourth month in a row, although six months ahead expectations improved.

A key driver may be the Fed’s recent dot-plot and expectations that monetary policy may be loosened in 2024.

Business owners will have to remain on guard given the risks of divergence between the Fed’s uncertain trajectory on the number and timing of potential rate cuts and market perceptions of the same.

At the same time, inflation remains above the 2% target and continues to be a concern.

Regarding natural gas prices, the US EIA forecasts that production will increase by 1.2% in volume terms over the next twelve months.

Prices are likely to head higher in the first week of the new year with projections of colder weather.

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