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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2008 REVISITED: JAPANESE YEN STRENGTH, GLOBAL ECONOMIC WEAKNESS (c) Leo Haviland June 4, 2012

The long running bull march in the Japanese Yen from early summer 2007 to the current time generally coincides with a continuing worldwide economic crisis. The Yen’s robust strength mirrors the failure by central bankers and politicians around the globe to cure the lamentable financial ills. National policies often differ. The international guardians frequently coordinate their rescue and stimulus programs. Yet measures such as deficit spending, money printing, efforts to keep government interest rates near the floor, and struggles to maneuver currency rates merely have patched and postponed severe problems, not genuinely repaired them. Worrisome debt and leverage issues revealed in 2007-08 lurk on in various forms.

The rally in the Japanese Yen on an effective exchange rate basis since around July 2011 warns that an acceleration of the worldwide crisis, as in mid-2008, may be underway or very near to commencing. Significantly, the climb in the Yen cross rate versus the US dollar since mid- March 2012 also fits the ongoing international economic weakness story. Recall that as the world economy deteriorated more and more quickly around mid-2008, not only did the US dollar rally on a broad real trade-weighted basis, but also the dollar weakened relative to the Yen. The strong dollar equals weak stocks (and weak commodities in general), weak dollar equals strong equities (and bullish commodities) chant remains popular.

The world and perspectives on it are not immutable, so 2012 does not precisely duplicate 2008. Yet given the experience of 2008, what does a rally by the dollar in general, if accompanied by a rally in the Yen (effective exchange rate), and especially if the Yen also marched higher against the dollar on a cross basis, portend? This would hint that the disturbing international crisis is in the process of becoming more fearful. And since March 2012, that seems to be what has been happening.

The current dangerous situation in the ongoing worldwide economic crisis, if it further worsens (and it probably will worsen to some extent, even if the deterioration is not nearly as severe as in 2008), will be sufficiently severe to induce policy makers around the globe to take further substantial steps in their struggles to provide long-lasting remedies. Perhaps such actions by central bankers and political leaders may occur relatively soon. These may issue from individual nations in somewhat piecemeal fashion. Yet there is a substantial chance that intervention will be relatively coordinated, especially if an encore of second half 2008 looks more and more to be underway.

But in the meantime, for the near term, the Japanese Yen probably will keep rallying on an effective exchange rate basis; it probably will breach the 1/16/12 daily low of 187.5. The Yen likely will retest the Y75 level against the dollar. However, the US dollar (TWD) will remain fairly strong. The bear trend in worldwide equities and commodities in general therefore probably is not over. Renewed sustained weakness in both the Yen and the dollar would indicate an easing of the current stage of the global crisis.

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2008 Revisited- Japanese Yen Strength, Global Economic Weakness (6-4-12)

US PETROLEUM- TAKING STOCK © Leo Haviland, May 8, 2012

Crude oil streams and various refined products create an array of petroleum supply/demand pictures. Although America of course is not the entire oil universe, a survey of the recent overall United States petroleum inventory scene offers insight into the general petroleum price trend. Also recall the linkage in recent years of major trends between the S+P 500 and the petroleum complex (and commodities “in general”). This analysis of petroleum inventories in context underlines the current bearish trends in petroleum and the S+P 500.

At end March, US oil industry total inventory averages 50.3 days coverage (1996-2011, crude and products combined relative to total product supplied per day for that calendar month, Energy Information Administration inventory data; Strategic Petroleum Reserve stocks not included). End March 2012 days coverage climbed to 58.9 days supply. Not only did this soar more than eight days above average. It established a new record for that calendar month for the 1996- present era. Although the United States economy has been in a recovery for almost three years, these inventories broke beyond March 2009’s 58.2 day summit, achieved in the depths of the worldwide economic crisis and the month of the S+P 500’a major low (3/6/09 at 667).

These high supplies for March 2012 are not a one month aberration. Glance at the previous three months in historical context. From 1996 through end 2011, average total inventory for December is 50.2 days, January 51.0 days, and February 50.0 days. December 2011 ascended to a new record high for that calendar month; its 56.3 days of supply decisively beat 1998’s 55.4 days. What about January 2012? Not only is its 58.9 days coverage about eight days above average. They smash January 2010’s top of 56.8 days (compare January 2009’s lofty 55.8 days). February 2012’s 57.9 days coverage likewise significantly exceeds its calendar month average. Its huge days coverage decisively climbs over the previous stockpile record of 56.9 days achieved in February 2009.

As of 4/27/12 (weekly EIA data), US petroleum industry inventory slipped to around 56.9 days of supply (average daily total product supplied for the most recent four weeks). Total oil industry stocks nevertheless remain ample from the days coverage perspective. Although not a new end April record elevation (2009 was 58.8 days), it still vaults more than five days over end April’s 51.5 days coverage average.

On balance, just-in-case fears regarding petroleum inventory probably are diminishing, and will continue to do so for a while longer. A bear trend in petroleum prices probably also will interrelate with attitudes regarding just-in-case inventory management. If prices are dropping, why worry quite so much about supplies, right? ****

Analysis of NYMEX noncommercial petroleum positions indicates they probably reached a peak recently. Liquidation by net noncommercial longs probably has helped to move oil prices lower and probably will continue to do so.

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Petroleum- Taking Stock (5-8-12)
NYMEX Crude Oil (5-8-12)

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)

US NATURAL GAS- BUILDING ENTHUSIASM © Leo Haviland, April 16, 2012

Assuming normal weather, the current severe United States natural gas oversupply situation will become quite a bit less so in days coverage terms as inventory build season 2012 proceeds (and as winter 2012-13 draw season occurs). This will support prices. However, unless more substantial production cuts actually emerge, significant natural gas oversupply relative to historical averages probably will persist through winter 2012-13. Containment risks for the 2012 build period have not disappeared, but they probably will be less severe than many believe.

The average build from end April to end October is around 1784bcf. Days coverage rises about 29.4 days. A few years had slight additional builds into calendar November. For example, inventories peaked at 3837bcf on 11/27/09 (weekly statistics). The 2010 high was 3840bcf on 11/ 5/10. And in 2011, 11/18/11’s 3852bcf exceeded 10/28/11’s 3794bcf.

On 4/6/12, working gas inventories were 2487bcf, soaring 55.5 percent over the year-ago week’s 1599bcf. End April 2012 surely will represent a new record for that calendar month in bcf terms. Suppose end April 2012 stocks reach 2600bcf. Relative to full calendar year forecast demand of 69.6 bcf/day (EIA’s Short-Term Energy Outlook;“STEO”; 4/10/12; Table 5a), days coverage will be 37.4 days (2500bcf equals 35.9 days). This will break through 2006’s “recent history” 32.7 day ceiling of 32.7, though it falls slightly beneath 1991’s high for the 1990-present period. April 2012 leaps above April 2011’s 1789bcf and 26.8 days coverage. Compare end April all-time lows of 854bcf and 13.8 days coverage (1996).

Looking forward, depressed natural gas prices relative to coal probably will generate substantial fuel switching from coal to gas. Thus the stock build from end April to end October 2012 may be less than average.

Lows in arithmetic builds from end April to end October (1990-present) are 1991’s 1332bcf and 2002’s 1457bcf. The tiniest days coverage increase was 2002’s 23.1 days. In 2003, stocks ballooned a record 2237bcf over these months; 2003’s 36.7 day rise in coverage remains the record. The calendar 2011 inventory rise was 2015bcf, or 30.2 days coverage.

Suppose end October inventories are 4050bcf. That will represent 58.2 days coverage (4050bcf divided by calendar year 2012 average daily consumption of 69.6bcf per day). This is a bearish amount, for it is about 4.5 days above the 53.7 day end October average. However, it is two and one-half days below end October 2009’s 60.7 days. At 4000bcf, days coverage is about 57.5 days; at 4100, days coverage climbs to 58.9 days.

Numerous supply/demand variables of course intertwine to affect natural gas price levels, trends, and relationships. Perhaps current high inventory levels will continue to pressure prices, especially in nearby months. However, for NYMEX natural gas (nearest futures continuation basis), remember the major bottom in September 2009 (9/4/09) was around 241. Assume that end October 2012 US inventory appears headed for “about” 57.5 to 58.9 days coverage, less than October 2009’s 60.7 days. Then all else equal, for NYMEX natural gas prices “around the time of the later months of 2012 build season” to sustain lows under September 2009’s price depth, there probably will have to be noteworthy containment problems.

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Natural Gas- Building Enthusiasm (4-16-12)