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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The growing natural gas production from the United States Eastern region over the past couple of years has played a key bearish role within the overall American natural gas theater.
The Eastern territory contains numerous important pricing locations. Although the various hubs offer spot pricing information, not all of them provide substantial forward month pricing (and forward trading). The Leidy and Zone 4 Marcellus hubs represent notable natural gas output centers within the East. Algonquin City Gate, in contrast, is a widely-watched Eastern delivery point.
Focusing on the Leidy and Zone 4 Marcellus Hub spot marketplaces together offers insight into Eastern region price trends. The first attached chart averages the Leidy and Zone 4 Marcellus spot prices (individual series from Bloomberg; daily settlements) since mid-November 2011).
The general price trends for this Leidy/Z4Marcellus benchmark over the past two years (see the solid black line on Chart 1) generally parallels those of NYMEX nearest futures continuation (Henry Hub/Louisiana, which rests within the EIA’s “Producing Region”. The chart also shows that many key price turning points for the Leidy/Z4 Marcellus spot combination have occurred around the same time as those in the NYMEX first futures continuation contract. The handwritten Leidy/Z4Marcellus prices are in blue ink, the NYMEX handwritten ones in black, Thus this Eastern price behavior frequently tends to confirm (intertwine with) notable NYMEX natural gas price trends.
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Statistics from the Treasury Department on foreign buying and selling of US securities presently extend only through May 2013. Yet reduced net foreign acquisition (official and private sources combined) of UST notes and bonds confirms the trend of higher UST rates over the past year (use the 10 year note as a benchmark). Moreover, as overseas UST holders actually have been net UST sellers on average over the first five months of calendar 2013, this warns of higher UST yields on the horizon. Although UST yield trends depend on numerous factors, including federal fiscal trends, the Federal Reserve hints that it will reduce its gigantic UST buying (money printing) in the relatively near future. And doesn’t the Fed’s two percent long term inflation target and its higher Federal Funds rate forecast for the long run portend higher rates?
The United States has enjoyed a fairly robust economic recovery since around the time of the major low in the S+P 500 around 667 on 3/6/09. Yet despite this, foreign direct investment in America not only has not matched the highs of 2000 and 2008, it shows signs of ebbing, particularly in first quarter 2013 (the most recent data point).
This recent dive in net foreign direct investment is roughly consistent with the slide in net foreign buying of UST notes and bonds and American corporate debt. Looking forward, this combination suggests that higher US interest rates and a weaker US dollar are on the horizon. Does net foreign direct investment data offer warning flags for equity voyages? Recall that highs and subsequent declines in foreign direct investment roughly paralleled pinnacles and falls in the US stock marketplace in first quarter 2000 and October 2007/May 2008. Suppose American interest rates keep climbing, or that the US dollar drops significantly (or both) and that US corporate earnings do not grow much if at all.
Anyway, a survey of net foreign buying that includes not only long term debt but also stocks shows a significant slide over the first five months of calendar 2013 relative to the past several years. Five months obviously is a fairly brief period. Yet this slowing net acquisition, when interpreted alongside the decline in foreign net direct investment, hints that America “in general” is becoming relatively less desirable to foreigners from the economic standpoint than it used to be. Admittedly this conclusion is contrary to much rhetoric flowing through marketplaces and media.
These rather recent US securities and direct investment patterns, because they float alongside the long run bear trend (relatively weak) for the broad real trade-weighted dollar as well as the continued probability of US current account deficits, signal that the trade-weighted dollar generally will remain feeble and probably will decline.
So in the current and future marketplace context, arguably the significant FDI slump since calendar 2011 (assuming no big jump in FDI from the calendar 2012/1Q13 levels) may be a leading indicator of a decline in the S+P 500. In any case, the slowdown in FDI since 2011- and particularly 1Q13’s depressed amount (assuming such a mediocre quantity persists)- hints that in a rising US interest rate environment that it will become increasingly difficult for US stocks to make new highs unless further big (net) new waves of US cash venture into those equities.
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These 12 electricity charts cover six hubs (PJM West, Mass Hub, Ercot North, SP 15, Palo Verde, and MidC) for winter 2013-14 (using January 2014 and February 2014 months) and the 2014-17 calendar strip (all four years, all months combined). The electricity chart commentary interrelates with viewpoints on NYMEX natural gas.
The assorted US electricity hubs do not always tell the same or even almost the same tale. In a particular electricity region, the perspective regarding seasons (including their supply/demand) are not always identical; summer may look much different than winter. The US electricity theater and its scenery of course is not exactly the same as that of natural gas. And the electricity and natural gas relationships for a given geographical region can vary, sometimes dramatically, from those elsewhere.
NYMEX natural gas started an important bear trend in spring 2013 (see, for example, the nearest futures continuation marketplace double top high of 4/18/13 at 4.429 and 5/1/13 at 4.444). It is a noteworthy story that price declines since late May 2013 in various electricity hubs for both winter 2013-14 and the calendar 2014-17 strip coincide with (actually, shortly preceded) the interim bear stage in NYMEX natural gas that commenced 5/28/13 (nearest futures 4.308). Since late May 2013, natural gas “in general” has not been tumbling lower on its own; the overall US electricity situation has closely intertwined with and encouraged it.
Note that according to the EIA, US total electricity consumption rises merely .7 percent in calendar 2013 versus calendar 2012. The EIA predicts American electricity demand in calendar 2014 climbs only about one percent relative to 2013 (Short-Term Energy Outlook, July 2013, Table 7a).
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Electricity Chart Analysis- a Scenic View (7-17-13)
What is the near term outlook for United States natural gas prices (nearest futures continuation)? They probably will retreat further from around the ceilings reached in mid-April to early May 2013. A 20 percent decline gives around 356, rather close to the 6/28/13 low at 353. However, assuming normal weather, a breach of 350 probably will be modest. Some support exists around 328, the 7/31/12 high; important support exists around the 305/310 first quarter 2013 level. The most likely time for at least an interim bottom is late August to calendar September 2013.
Why remain somewhat bearish on US natural gas for the near term? After all, natural gas clearly constructed a major low around 190 on 4/19/12, and that floor probably will not be broken anytime soon. Also, US gas inventory in days coverage terms at end October 2013 from the long run (1990-2012) perspective probably will be only slightly above average. Moreover, perhaps the desired levels of natural gas inventory holding have shifted upward in recent years. This is by no means certain, though. In any event, if one selects the 2006-12 horizon as the relevant one, then end October supplies fall modestly below this revised average.
Nevertheless, even if marketplace engineers adopt the 2006-12 vista as the most relevant one for inventory analysis, natural gas stocks at end winter 2013/14 draw season probably will be moderately high relative to average in days coverage terms. In addition, the noncommercial long position in natural gas that helped to propel prices to their spring 2013 heights, though it has slumped in recent weeks, remains substantial. Its liquidation will pressure prices. Despite the neutral (or even slightly bullish) inventory situation in days coverage terms for October 2013, the American supply/demand situation from the production and consumption trend perspective for 2013 (at least the past few months and “nowadays”) and (especially) 2014 on balance is slightly bearish. Demand from the key electric power sector arguably will not jump up in the near term unless prices sustain falls under 350. Notable US LNG exports remain a prospect for the relatively distant future. Overall US electricity consumption growth remains mediocre.
Over the mystical time horizon called the long run, assuming normal weather and moderate American economic growth, the longer run natural gas trend probably is sideways. The broad range stands from roughly 280/310 to 490/520.
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