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 INVENTORY: THE PRODUCING REGION SCENERY © Leo Haviland May 6, 2013

When United States natural gas 2013 build season ends this autumn, inventories in the key Producing Region probably will be around 1200bcf, plus or minus five percent (1140bcf to 1260bcf range). Based upon historic inventory patterns, especially those of 2006 to the present, most marketplace participants probably would view around 1200bcf as average. Unlike build season 2012, the Producing Region will not confront notable containment issues this year.

Suppose a bear trend for NYMEX natural gas (nearest futures continuation) emerged from the recent highs over 440. One time to look for an important bottom is in late August/calendar September 2013.

Historical review of Producing Region inventory levels and trends alongside NYMEX natural gas price trends and levels reveals a rough pattern. Assume that gas prices establish an important peak. Although the history is relatively brief, there is a seasonal tendency for natural gas prices (NYMEX nearest futures continuation) to establish important bottoms sometime around late calendar August through calendar September and thus in the later stage of Producing Region (and US) build season. See the table above. Several of these lows were major trend change points.

This is a guideline, not a destiny.

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Natural Gas Inventory- the Producing Region Scenery (5-6-13)

US NATURAL GAS INVENTORY- THE PRODUCING REGION STORY © Leo Haviland, May 1, 2012

United States natural gas inventories in the key Producing Region at end winter draw season 2011-12 broke records for that time of year. At their low point on 3/9/12, Producing Region working gas inventory of 965bcf soared about 40.5 percent beyond winter 2010-11’s 687bcf and winter 2008-09’s 690bcf. The new record plateau for the end of draw season blasts 123.9 percent above the end draw season average (1994-2011). Producing Region inventories remain sky- high. On 4/20/12 they were 1041bcf. These jump 31.9 percent above last year’s level at this time (789bcf; 4/20/11). When 2012 natural gas build season ends this autumn, stockpiles probably will be lofty relative to long run history.

It is a truism that much can (and will) happen in the natural gas supply/demand battlefield and related theaters between now and the close of 2012 build season. Assume normal summer weather and continued modest American economic growth. Many marketplace generals declare that brimming inventories definitely or almost certainly will cause the Producing Region (“PR”) to suffer notable containment (“overflow”, “overcapacity”) problems this fall. Not only gas and power trading insiders, but also numerous Main Street spectators and assorted political guardians, fervently speak of the explosive gas production increase of the past few years. Because end winter 2011-12 PR gas inventory already stood high in arithmetic (bcf) terms, PR stockpile increases at around the average historical rate (1994-2011 era) during 2012 gas build season will stretch capacity in this key territory.

The PR indeed faces significant containment risks. By end build season 2012, these risks may burst into actual physical problems for much of the region. However, an alternative scenario is more likely. For the PR area as a whole, although the containment challenge probably will be a very close call, the region probably will scrape by. In any event, and as of now, an excessive inventory relative to available storage situation throughout the PR is significantly less certain than many proclaim.

Why question the widespread faith that the PR containment problem will be severe and widespread? Gas demand is rising. Substantial fuel switching from coal to natural gas has occurred and likely will continue. Despite the recent shale gas boom, as well as gas production associated with crude oil output in some locations, US natural gas production growth (overall output) may be less than sentinels forecast. Not only are prices still depressed. The US gas rig count has retreated dramatically.

A crucial consideration for the containment debate in the PR (and elsewhere) is the amount of gas storage available around the time of build season inventory peak. Admittedly, any current viewpoint on US gas storage capacity for the end of build season 2012 is quite conjectural. Nevertheless, relative to the most recent Energy Information Agency (“EIA”) estimates of demonstrated peak working gas storage capacity, sufficient storage in the PR probably has been and will be created to avoid a significant containment problem this autumn.

To assess the likelihood of severe containment problems throughout the Producing Region (and related natural gas price implications), the crucial issue therefore is how much natural gas storage probably has been and will be constructed (developed) since April 2011 (the most current EIA overview).

Despite some seasonal tendency for prices to finish a bear move (or end an important stage in a downtrend) in late summer or autumn, it does not follow that prices drop off a cliff from the preceding end winter (or early spring) without an interim rally. The price could make a low, rise for a few months, and then drop to make a bottom in (for example) late August or calendar September.

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Natural Gas Inventory- the Producing Region Story (5-1-12)

MARKETPLACES AND POLICIES- MAKING CONNECTIONS © Leo Haviland, November 29, 2011

Since the current economic crisis emerged in 2007, a rough pattern has been that major movements and levels in US Treasury ten year note yields have preceded or coincided with those in the S+P 500. Thus, “in general”, plummeting UST yields have been paralleled by diving stock prices. And rising interest rates are connected to rallies in stocks. So in today’s world, gurus and guides often underline that higher and higher UST rates fit an economic recovery (health) scenario. In contrast, collapsing rates indicate looming (or actual) disaster; hence the popularity of flight to quality and safe haven commentary in regard to UST. Such relationships between the UST 10 year note and stocks (and variables allegedly bound to them) of course help forecasters to assess probabilities for and predict important debt and equity trend changes. Looking forward, this ongoing pattern may well persist.

Yet at some point, and arguably within the next several months, the present relationship between the US ten year and the S+P 500 may change. Thus rising UST yields eventually may coincide with sinking stocks. What key trading levels for the 10 year should one keep an eye out for? Such trigger point ranges will vary over time. So anyway, what guidelines for nowadays? If the US 10 year note yield floats decisively above the 2.50 percent level, and if stocks rally very little as that yield barrier is breached, that would hint the current (2007-2011) UST/S+P 500 relationship is altering.

As the global economic crisis flows on and on, many of its intertwined actions and participants (and thus marketplace relationships) may remain relatively unchanging. But they are not stagnant. Today’s marketplace voyagers should wonder if the crisis has drifted closer and closer to a new round of difficulties. Look at European yields, and place Germany on the sidelines. Focus instead on Greece, Portugal, Ireland, Spain, and Italy. These countries show that severe economic problems (and downturns) are not always or inevitably associated with falling (or low) government interest rates.

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Marketplaces and Policies – Making Connections (11-29-11)