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: TRAVELING FORWARD © Leo Haviland June 13, 2016

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Bob Dylan’s song “All Along the Watchtower” states:
“’There must be some way out of here,’ said the joker to the thief
“’There’s too much confusion, I can’t get no relief’”.

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CONCLUSION

The United States natural gas (NYMEX nearest futures continuation basis) major bear trend that followed 2/24/14’s major peak at 6.493 ended with 3/4/16’s 1.611 bottom. For the next several months, however, natural gas likely will remain in a sideways pattern. The probable range for the United States natural gas marketplace remains a relatively broad avenue between major support at 1.60/1.90 and significant resistance at 3.10/3.45. This sideways outlook partly results from two currently contending marketplace stories.

For the near term, substantial natural gas oversupply exists, weighing on prices. Containment risks still loom for end of build season 2016. If noteworthy containment problems erupt, March 2016’s bottom may be attacked, even though current prices hover significantly above 1.60/1.90 and even if an assault on that support does not last for much time. What if a torrid summer 2016 dramatically reduces the stock build total and thus helps containment fears for end build season 2016 to disappear? Then prices likely will not revisit the 1.60/1.90 range, but instead will maintain their ascent toward 3.10/3.45.

The US natural gas supply/demand perspective over the so-called long run is moderately bullish. Assuming normal winter 2016-17 weather, moderate US economic growth, and no renewed collapse in the overall commodities complex (particularly petroleum), gas prices probably will march higher.

 

NATURAL GAS: (PARTLY) DANCING IN STEP WITH OTHER MARKETPLACES

Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” marketplaces and variables. Trend changes in NYMEX natural gas need not roughly coincide with one in the petroleum complex or commodities in general, or currency, stock, or interest rate playgrounds.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 peak at 2135. In regard to the timing of the S+P 500’s May 2015 high, the nominal broad trade-weighted dollar (Federal Reserve, H.10, which has daily data) made an interim low at 112.8 on 5/15/15 before appreciating further.

The recent low in NYMEX natural gas nearest futures, 3/4/16’s 1.611, occurred fairly close in time to the first quarter 2016 peak in US dollar and an assortment of notable intertwined 1Q16 lows in other important marketplaces. The trend shifts (price reversals) in first quarter 2016 in various marketplaces assisted the upward move in natural gas that emerged in early March 2016.

**The broad real trade-weighted United States dollar (monthly average) peaked at 101.2 in January 2016; the nominal TWD (which has daily data) established a top 1/20/16 at 126.2 (Federal Reserve, H.10).

**NYMEX crude oil (nearest futures continuation): bottoms $26.19 on 1/20/16 and $26.05 on 2/11/16.

**Broad Goldman Sachs Commodity Index (GSCI): 268 on 1/20/16. January 2016’s GSCI low occurred midway between the calendar month times of its 2008-09 bottom (12/24/08 at 308 and 2/19/09 at 306).

**S+P 500: Note the sharp rally from lows of 1812 on 1/20/16 and 1810 on 2/11/16.

**MXEF (MSCI emerging stock markets index; Morgan Stanley): 687 on 1/21/16, 708 on 2/12/16.

**Ten year US Treasury note: 1.53 percent yield low 2/11/16.

 

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US Natural Gas- Traveling Forward (6-13-16)

DANGEROUS TIMES IN US NATURAL GAS © Leo Haviland November 2, 2015

The probable range for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a relatively broad avenue between major support at 1.65/1.90 and significant resistance at 3.10/3.45. For prices to sustain voyages over 3.00, it probably will require a significantly colder than normal winter or noteworthy cuts in natural gas production. A containment risk (supplies too high relative to available storage), although currently not probable, nevertheless lurks for the end of calendar 2016 build season, especially if 2015-16’s winter is warmer than usual. If significant containment problems develop, and perhaps even if the potential for significant containment difficulties significantly increases, the 1.65 to 1.90 floor could be broken.

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The NYMEX natural gas major bear trend that followed 2/24/14’s major peak at 6.493 smashed through 4/27/15’s 2.443 low, tumbling to 1.948 on 10/27/15 (near NYMEX contract expiration; many key troughs have occurred around contract expiration). The late October 2015 depth borders the last prior major bottom, 1.902 on 4/19/12. Historical analysis indicates the bear trend from February 2014 to October 2015 travelled sufficiently far in price and duration terms to look for a trend shift from bearish to neutral or bullish. In addition, the most recent Commitments of Traders reports for key natural gas contracts reveal a massive net noncommercial short position. Many significant marketplace trend changes in natural gas roughly coincide with very elevated net long or short noncommercial positions. Current and (assuming normal weather) anticipated upcoming natural gas days coverage through winter 2015-16 and the 2016 build season appear fairly close to historical averages, particularly in the context of NYMEX natural gas prices well under 3.00.

However, the dramatic February 2014 to October 2015 price tumble is not the greatest or longest on record. So a further descent in NYMEX natural gas would not be unprecedented. Moreover, the days coverage perspective of course does not provide a complete viewpoint on the natural gas inventory situation and related price risks. After all, arithmetic quantities (bcf) of gas must be put in arithmetic storage places. And currently, the containment risks for the end of build season 2016 are not insubstantial; this bearish potentiality weighs on prices.

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Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” factors. Trend changes in NYMEX natural gas need not coincide with one in the petroleum complex or in commodities in general.

However, especially since mid-to-late June 2014 (NYMEX natural gas nearest futures interim high 6/16/14 at 4.886) and into calendar 2015 (gas interim top 5/19/15 at 3.105), bearish natural gas price movements have intertwined with those in the petroleum complex (and commodities in general) and the bull move in the broad real trade-weighted US dollar. Such natural gas retreats to some extent have paralleled slumps in emerging marketplace stocks. Note also the timing coincidence between May 2015’s natural gas top and the S+P 500’s 5/20/15 high at 2135. See “Commodities: Captivating Audiences” (10/12/15) and other recent essays.

Worldwide OECD industry and United States petroleum stocks are very elevated. OPEC next meets 12/4/15. It remains determined to capture market share and induce output cutbacks by high-cost oil producers around the world (including some American and Canadian ones). Thus even if petroleum manages to rally further from its recent lows, it likely will remain relatively weak. The broad real trade-weighted United States dollar edged slightly lower (about one percent) to 97.0 in October 2015 from its September 2015 bull move high at 98.0 (Federal Reserve, H.10; monthly average), but it probably will remain relatively strong for the near term. Weak oil and a strong dollar, all else equal, are bearish factors for American natural gas prices.

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Dangerous Times in US Natural Gas (November 2, 2015)

COMMODITIES: CAPTIVATING AUDIENCES © Leo Haviland October 12, 2015

OVERVIEW AND CONCLUSION

The Federal Reserve Board is a widely-watched star economic performer. Elvis Presley sings in “Jailhouse Rock” that “Everybody in the whole cell block Was dancin’ to the Jailhouse Rock”. The Fed’s actual and anticipated soulful lyrics and mesmerizing policy moves likewise attract, enthrall, and inspire Wall Street, Main Street, and political audiences. The Federal Reserve Board congregates 10/27-28/15 and 12/15-16/15.

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Though major stock, interest rate, and currency marketplaces typically grab the lion’s share of marketplace and media attention, recently commodities “in general” have marched to center stage alongside them. Central bankers, finance ministers, and other leading economic players pay close attention to the analysis and forecasts of the International Monetary Fund. October 2015’s featured cover page titles of the IMF’s “World Economic Outlook” (“Adjusting to Lower Commodity Prices”) and “Fiscal Monitor” (“The Commodities Roller Coaster”) evidences this increased fascination with commodities.

Individual commodities such as crude oil, copper, and corn, as well as commodity sectors such as the petroleum complex, of course have their own supply/demand and inventory pictures. Perspectives on these can and do differ between observers. Yet commodity price trends in general are hostage not only to their own supply/demand situation and general economic growth trends, but also to movements in equities, interest rates, and foreign exchange. Particularly over the past several months, stock and other financial playgrounds more closely have intertwined with noteworthy travels in crucial commodity theaters such as petroleum and base metals. Such increasingly strong ties developed in the past during similar sustained dramatic commodity price adventures.

The current significant link between commodities in general (use the broad Goldman Sachs Commodity Index as a benchmark; the “GSCI” is heavily petroleum-weighted) and other key arenas such as the S+P 500, emerging stock marketplaces in general (“MXEF”; MSCI emerging stock markets index, from Morgan Stanley), and the broad real trade-weighted United States dollar (“TWD”) probably will persist at least for the next several months. Stocks, the dollar, and the GSCI probably will all move in a sideways path for the near term. The Fed and its allies do not want the S+P 500 to collapse twenty percent or more (and maybe not even much more than ten percent) from its May 2015 summit. They also do not want the TWD to break out above its September 2015 high (that barrier slightly exceeds the crucial March 2009 major top).

However, the bear move in the S+P 500 that emerged in May 2015 eventually will resume. The US dollar, though its rally from its July 2011 major low has paused, will remain relatively strong. OECD petroleum industry inventories in days coverage terms are very high from the historical perspective. Despite some crude oil production cuts in the United States and elsewhere, overall oil industry inventories likely will remain quite elevated through calendar 2016. So even if in the near term the broad GSCI rallies further from its current level (which likely would occur alongside a further modest S+P 500 ascent and dollar slide from their current altitudes), it probably ultimately will challenge its late August 2015 low.

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As the enrapturing Goldilocks Era ended, stocks peaked before commodities. The S+P 500’s major high was 10/11/07’s 1576, with that in emerging marketplaces (MXEF) alongside it on 11/1/07 at 1345. The broad GSCI made its major peak on 7/3/08 at 894 (the Bloomberg Commodity Index (“BCI”) top also was on 7/3/08, at 238.5). However, this was close in time to the S+P 500’s final peak at 1440 on 5/19/08 (and the MXEF’s final top at 1253 on 5/19/08), and not long after the TWD’s important April 2008 low near 84.2 (Fed H.10; monthly average). The GSCI’s 2/19/09 major low at 306 (BCI bottom 2/26/99 at 74.2) occurred near the S+P 500’s major bottom, 3/6/09 at 667, which occurred alongside the TWD’s March 2009 major top at 96.9. The MXEF’s major trough occurred 10/28/08 at 446, its final low 3/3/09 at 471.

During the worldwide economic recovery that set sail around 2009, neither commodities in general nor the MXEF surpassed their 2008 plateau.

The major high in commodities in general and the MXEF (spring 2011) and their important 2014 interim tops occurred before the S+P 500’s May 2015 height. This pattern differs from the 2007-08 one. In late spring 2015, the S+P 500 (as did China’s Shanghai Composite stock index) nevertheless joined (encouraged) the slump in the MXEF and commodities alongside an acceleration of US dollar strength. Thereafter, as in the speeding up of the global economic crisis after around mid-2008, the S+P 500, MXEF, and broad GSCI retreated together in conjunction with TWD appreciation. Also note the similar late August 2015 troughs in commodities and stocks. Though more recent data from the Fed on the TWD eventually will emerge, key US dollar cross rates in the past couple of weeks hint the broad TWD perhaps has slipped a bit since its September 2015 high.

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Is OPEC’s new policy of reducing high-cost (non-OPEC) production succeeding? Some, but not a great deal so far. Despite the dive in drilling rig counts, OECD days coverage levels and the worldwide supply/demand balance for 2015 and 2016 reveal plentiful petroleum.

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Commodities- Captivating Audiences (10-12-15)

US NATURAL GAS: THE OUTER LIMITS © Leo Haviland October 21, 2013

For the benchmark NYMEX natural gas contract, most traders, “investors”, hedgers, and the media focus closely on the significant price travels and levels of the rolling nearest futures continuation contract, or on the current actual front month contract (such as November 2013). Some marketplace watchers extend their attention to the next several months (as in the winter 2013-14 or summer 2014 gas calendar strips), or perhaps a year out from any given current time. Relatively few clairvoyants outside of a relatively small handful of natural gas and electricity professional insiders intensively examine the price action and levels of forward months over a year out, as in the NYMEX calendar 2015, calendar 2017, and calendar 2020 natural gas strips.

Distant time horizons in financial and commodities marketplaces are not islands apart from the spot (physical) and near term periods. Therefore surveying the price flights, dives, and levels of such “outer limit” time horizons within the NYMEX natural gas marketplace complex provides insight into trading spans (forward marketplaces) close to the current time.

The current sideways trend for NYMEX nearest futures natural gas to some extent encourages a similar pattern in that universe’s distant year periods. The wide-ranging uncertainty relating to NYMEX natural gas’s distant period supply/demand situation- including liquefied natural gas export volumes, the extent of United States economic and electricity demand growth, and issues relating to coal and renewables- to some extent encourages the persistence of a sideways trend for the long run horizon, and thus for NYMEX nearest futures continuation.

What’s the overall current trend for NYMEX distant month natural gas marketplaces such as the NYMEX 2015 and following year calendar strips? On balance, though these assorted calendar strip arenas are at different price levels and do not have exactly the same supply/demand situation, on balance these are in a sideways to down trend, not just a sideways one. Assuming normal weather for upcoming winter 2013-14, although nearest futures continuation will remain trapped in its broad range, nearest futures probably will drift lower from current levels, with a significant chance of challenging its calendar 2013 depths around 305/313. This probably will encourage a renewed test and probable breaking by the calendar strips of 2015 and thereafter of their April (or June, in some cases) 2012 bottoms (which are comparable to those achieved, depending on the calendar strip, in early August 2013 or thereafter). Note that even if America’s LNG exports may be potentially large, any such actual (noteworthy) exports probably will not occur for at least around another couple of years from now.
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