GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.

 

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US NATURAL GAS: ON THE ROAD © Leo Haviland August 2, 2015

The probable avenue for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a range between 2.15 and 3.40. The major bear trend that followed 2/24/14’s major peak at 6.493 attained a key bottom with 4/27/15’s 2.443 low. Was this a major low? Perhaps, but prices probably will challenge that level again and perhaps modestly break it over the next several months.

But why? After all, assuming normal weather, current and anticipated upcoming natural gas days coverage through winter 2015-16 tend to support prices, particularly in the context of NYMEX natural gas prices well under 4.00. Historical analysis indicates the bear trend from February 2014 to April 2015 travelled sufficiently far in price and duration terms to justify a shift to a neutral to bullish outlook. Also, the last prior major low, 1.902 on 4/19/12, likewise occurred in calendar April. Many key bottoms have occurred around contract expiration. In addition, many significant marketplace trend changes in natural gas (and petroleum) roughly coincide with very elevated net long or short noncommercial positions. From the historical perspective, the net noncommercial short position was very large around the time of April 2015’s low; the net noncommercial length likewise was substantial around the time of the February 2014 peak.

Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” factors. However, especially since mid-to-late June 2014 and into calendar 2015, bearish natural gas price movements have intertwined with those in the petroleum complex and the bull move in the broad real trade-weighted US dollar. The retreats since their spring 2015 highs in the commodities complex in general and petroleum in particular fit with similar slumps in natural gas. Petroleum likely will remain weak and the US dollar will remain strong for the near term, which will be bearish factors for American natural gas prices.

Quite a few marketplace observers believe the US natural gas marketplace will have massive inventories at the end of calendar 2016 build season (end October). This bearish perspective also weighs on prices. Although such oversupply probably will not occur (assume normal weather), such views are not unreasonable.

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US Natural Gas- On the Road (8-2-15)

US NATURAL GAS: BUILDING UP © Leo Haviland April 1, 2014

Assuming normal weather for spring and summer 2014, the NYMEX natural gas complex in general, including the nearest futures continuation benchmark, probably will trade in a sideways to rising trend.

United States natural gas inventory days coverage at the end of the 2013-14 winter draw season is very low arithmetically (bcf) as well as from the more important days coverage vantage point. However, winter ends every year. As the April/October build season will diminish short term fears of running out of natural gas, bears snarl that it becomes more difficult to sustain prices over 5.00. Yet for prices to remain under 5.00 over the upcoming summer build and winter 2014-15 draw seasons, much depends on whether 2014 gas production climbs by significantly more than two bcf/day year-on-year. The Energy Information Administration predicts a 1.8bcf/day output increase (Short-Term Energy Outlook, “STEO”, Table 5a, 3/11/14; next release 4/8/14). Some assert that fuel switching from natural gas to coal will occur in the key electric power sector in calendar 2014 if natural gas prices remain at current levels, and especially if they trend higher. The EIA believes 2014 electric power demand edges about .3bcf/day lower relative to 2013’s level (though calendar 2015’s ascends a modest .6bcf/day versus 2014). Keep in mind the still substantial net noncommercial long position in natural gas at present. All else equal, liquidation of a substantial part of that net length would weaken prices.

Yet analysis of the days coverage variable constructs a bullish case. Assume normal spring and summer weather. Suppose the EIA’s production estimate does not greatly miss the actual output boost. Then not only in the early months of build season, but also at its close at end October (or early November), days coverage for US natural gas inventories will remain well below average (typical, normal; desired). Admittedly, the United States natural gas inventory situation probably will become less tight over the course of winter 2014-15. If late autumn and winter weather is normal, working gas inventories days coverage probably still will be somewhat below normal during winter 2014-15 since they should commence draw season at very depressed levels.

The list of uncertainties surrounding natural gas supply/demand is long. But given that US gas stocks are very depressed now, a look forward at the probable working gas inventory situation for the next several months suggests the NYMEX nearest futures continuation contract probably will break into the 500/520 range over the next several months, and perhaps by the end of summer.
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US Natural Gas- Building Up (4-1-14)

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.

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Natural Gas- the Winter Inventory Drawing Board (10-1-12)