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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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”.
CONCLUSION AND OVERVIEW
Is the major bull trend for NYMEX natural gas (nearest futures continuation) that began in early March 2016 finished? Probably not, though it is a difficult call. In any event, assuming normal weather and moderate United States economic growth, it nevertheless will be very hard for the NYMEX front month price to exceed 12/28/16’s high bordering 4.00 by much (if at all) anytime soon.
The probable longer run bullish US natural gas inventory situation suggests the likelihood of eventual further moderate rises in NYMEX natural gas prices (nearest futures continuation). The days coverage perspective underlines this, particularly in light of anticipated stockpiles at end October 2017 and thereafter. A comparison of the recent bull move that started in March 2016 to the prior major bull move inaugurated on 4/19/12 at 1.902 offers insight into past and potential trends.
Marketplace history does not necessarily repeat itself, whether entirely, partly, or at all. But all else equal, since 2016’s natural gas rally was less than average in time and (percentage) distance terms, this also indicates the move that commenced in March 2016 probably has more time and price to run. NYMEX natural gas (nearest futures continuation) rallied about 148 percent in about ten months from its 3/4/16 bottom at 1.611 to its 12/28/16 high at 3.994. The distance and duration for eleven major bull moves in NYMEX natural gas (nearest futures continuation) since trading began in 1990 is about 246 percent and twelve months and three weeks.
Some bull voyages took a very long time to complete. For example, the April 2012 to February 2014 advance lasted about twenty-two months and a week. September 2003-December 2005’s flight took 26 months and three weeks; the August 1998 to December 2000 adventure was 28 months.
However, the move above December 2016’s height may not be substantial and could take at least a few months to occur. Why?
First, US natural gas inventories in days coverage terms at end March 2017, though they likely will slip slightly below those at end March 2013, nevertheless will hover around end March long run averages.
A few major (over 120 percent) bull charges were shorter in extent or briefer in time than 2016’s leap, so an assertion that the 2016 rally ended in December 2016 is not “unreasonable”. Besides, the NYMEX natural gas 26 year trading history is relatively short; compare wheat or the Dow Jones Industrial Average. In any case, one big bull move voyaged up around 123.5 percent, another 129.2pc. For the time horizon parameter, three major bull moves from 1990 to the present were completed quickly. One finished in about two months, another in about three and a half months, and a third in four months. In this context, and although marketplace history is not marketplace destiny, several major peaks in NYMEX natural gas occurred in calendar December, with another one in early January. NYMEX natural gas often attains its major peaks and valleys around the day of the actual nearest futures contract expiration.
The CFTC’s Commitments of Traders reveals a massive net noncommercial long position in the natural gas complex. An elevated net noncommercial position in natural gas has often (but not always) been associated with key marketplace trend changes. The current net noncommercial long position in the petroleum complex likewise is extremely large from the historical standpoint. Both natural gas and petroleum currently are vulnerable to liquidation by the net noncommercial long fraternity, which would tend to pressure prices.
For predicting NYMEX natural gas price trends, monitor those in the petroleum complex. NYMEX crude oil’s 2/11/16 trough at $26.05 (nearest futures continuation) occurred shortly before the NYMEX natural gas bottom on 3/4/16 (and alongside the S+P 500’s 2/11/16 trough at 1810). NYMEX crude oil made important interim lows in its rally, $39.19 on 8/3/16 and $42.20 on 11/14/16; critical interim lows in NYMEX natural gas occurred near in time to these. Remember 8/12/16’s 2.523 and 11/9/16’s 2.546. NYMEX crude oil’s recent high occurred 1/3/17 at $55.24, adjacent in time to 12/28/16’s 3.994 natural gas elevation.
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US Natural Gas- a View of the Past, a Vision of a Future (1-21-17)
Not long after July 2008’s major peak in crude oil prices, the European Central Bank President, Jean-Claude Trichet, declared that “predictions of the future prices of commodities are probably the most difficult exercise you can imagine.” (“Introductory Remarks with Q&A”, 8/7/08)
OPEC, finally fearful of sustained low petroleum prices and renewed price slumps, troubled by elevated oil production and lofty inventories, formally met 9/28/16 in Algiers. The ministers established a crude oil production target range of 32.5 to 33.0 million barrels per day, beneath estimated September 2016 production of around 33.5mmbd. This agreement reflects a Saudi Arabian policy shift. That nation and its allies apparently will no longer countenance (risk) benchmark Brent/North Sea crude oil prices under around $35 to $40 per barrel for an extended period. OPEC ministers have engaged in dialogue with non-OPEC oil producers regarding output schemes. OPEC gathers 11/30/16 in Vienna. Output apparently will not be cut prior to the November meeting (Financial Times, 9/30/16, p20).
OPEC’s rhetoric and general policy approach likely will help support Brent/North Sea at prices around a $35-$40 range. However, for the near term, OPEC’s actions thus far in the context of the global supply/demand picture probably make it challenging for petroleum prices to sustain elevations more than a few dollars above their mid-October 2016 levels (on a nearest futures continuation basis, Brent/North Sea crude oil around $54, NYMEX around $52). Why? First, OPEC has not adopted specific country-based output reductions. Moreover, given ongoing quarrels within the organization, whether it will do so in November 2016 or even implement them in practice is uncertain.
In addition, actual OPEC crude production of 32.5/33.0mmbd probably will begin cutting oil stockpiles only by sometime around mid-2017.
Ongoing serious dialogue with crucial non-OPEC producers such as Russia represents a victory for OPEC. Suppose production cuts by notable non-OPEC nations combined with genuine OPEC discipline; that probably would help to rally prices above recent highs. The Saudi Arabian oil minister claimed that many nations will join OPEC in cutting production (Bloomberg, 10/19/16). However, he did not name names. If non-OPEC countries support OPEC measures, it is not nearly as clear as the Saudi minister claims that non-OPEC lands will slash output. A production freeze by Russia (and perhaps Mexico and other emerging marketplaces) is more likely, but even that is not certain. Russia’s President suggests his country is “ready to join the joint measures [freeze or production cut] to cap production” (Financial Times, 10/11/16, p20). Recall the 2/16/16 output freeze conversation between Saudi Arabia, Qatar, Venezuela, and Russia did not result in a production cut.
THE PETROLEUM RALLY: IS AN INTERMISSION APPROACHING?
Key resistance for NYMEX crude oil (nearest futures continuation) is the $51 to $52 band. The recent high was 10/19/16’s $51.93. This inched over 6/9/16’s $51.67 and represents nearly a 100 percent rally from February 2016’s $26.05 bottom. Brent/North Sea’s (nearest futures) high was 10/10/16 at $53.73 (6/9/16 top $52.86). Although petroleum and American natural gas do not always travel in similar fashion (“move together”), this crude oil timing parallels 10/13/16’s NYMEX natural gas top around 3.37. Although NYMEX crude oil prices have not fallen far from 10/19/16’s elevation, a five percent drop gives about $49.35, a ten pc one around $6.75.
Remember that OPEC, despite its enthusiastic September 2016 wordplay, and despite its making progress in dialogue with some non-OPEC members, does not have a well-defined (specific) production agreement (with specific quotas) yet. Its current crude oil output remains high.
A weaker US dollar arguably assists petroleum price rallies. But although the broad real US TWD (monthly average, Federal Reserve, H.10) is moderately weaker than its January 2016 pinnacle, the TWD remains strong. At 97.9 in September 2016, it stands above March 2009’s 96.8 major top (S+P 500 major low in March 2009).
The new record high in the S+P 500, 8/15/16’s 2194, surpasses 5/20/15’s noteworthy pinnacle at 2135, but not decisively (only by 2.8pc). The MXEF (emerging stock marketplaces) remains beneath its 4/27/15 top at 1069 (as well as previous highs in its downtrend: 1212 on 4/27/11 and 1104 on 9/4/14).
There are some signs of rising government interest rates, at least in the United States. The UST 10 year note is around 1.75 percent, up from 7/6/16’s 1.32pc. See “Running for Cover: Foreign Official Holdings of US Treasury Securities” (10/13/16). Although the Fed probably will not raise the Federal Funds rate in its 11/1-2/16 meeting (prior to the 11/8/16 US election), it may elect to do so in its 12/13-14/16 gathering.
Global economic growth remains relatively sluggish. Significant sovereign or corporate debt problems exist in many important countries.
Sometimes significant patterns and heights in net noncommercial petroleum positions can be in rhythm with important oil price trends. The current net noncommercial long position in petroleum is extremely substantial and probably is vulnerable to liquidation. A widespread run for the exits by such noncommercial longs likely would undermine petroleum prices.
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Playing in the Band- OPEC and Oil Prices (10-25-16)
The net Index Trader position for each of the 12 commodities has always been substantially net long. The net IT position percentage relative to total open interest for the various commodities differs, in some cases substantially: cocoa, corn, cotton, live cattle and wheat net long IT percentages are not the same. In any event, the average net long IT position for the 12 commodities combined from 2007 to the present is about 24.8 percent of total open interest (3/12/ 13’s is about 23.7pc). Thus the commodity buy-and-hold for the long run alternative investment community is a very important factor within the commodity arena.
Moreover, notable changes in the net long IT positions for the combined dozen marketplaces, offer insight into (helps to confirm) overall commodity price trends. A substantial addition over time to net IT positions is a bullish sign for the commodities sector, whereas a significant slash in these net IT positions warns of (or confirms) a bear trip. Of course since net IT positions and their changes are only one factor influencing commodity price level and trend, players should not be dogmatic regarding the role and predictive potential of this marketplace indicator.
Since mid-2008, commodities “in general” (use the broad GSCI as a benchmark) in recent years often have traded in patterns somewhat similar to those in United States stocks (S+P 500). Substantial bull (bear) moves in US equities find parallels in those in the commodity domain. Therefore stock marketplace congregations should monitor IT position levels and trends.
Yet recall 2007-08. American stocks peaked in October 2007, about nine months before the one in commodities. Only after the final stock summit in May 2008 did equities and commodities trade closely together. The current longer run relationship probably also reveals divergence, but with the commodity peak to date arriving well in advance of one in the S+P 500. See “Commodities and US Stocks: Convergence and Divergence” (1/28/03).
The net long IT position since early February 2013 has started to decline, as have prices in the broad GSCI and in the great majority of commodities, although stocks have remained robust. Admittedly IT data availability beginning in 2007 does not constitute an extensive history. One should interpret it in relation to commodity (and especially) stock trends with caution. However, given the frequent parallels of important commodity and stock trends since mid-2008, further notable slumps in the net long IT position alongside price falls in the broad GSCI will warn (help to confirm) that price divergence between the commodities and American stocks will cease. If so, and thus as occurred in spring 2008 and thereafter, stocks and commodities probably will begin to fall together. A boost in net IT positions conversely would be bullish for the S+P 500.
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Commodity Index Investment and US Stock Trends (3-20-13)
Burning passion for another is not the only love which makes us shake. When fear of losing substantial sums creeps up on numerous money lovers in intertwined financial playgrounds, both the players and their marketplaces can quiver violently.
Many pundits define a bear marketplace as a 20 percent slide from a noteworthy price top. Though the S+P 500 nosedived about 20 percent from its 5/2/11 high around 1371 to its 8/9/11 low near 1100, it then rallied sharply. On 8/9/11, the United States 10 year Treasury note touched yield lows of just over two percent. This matched the bottom achieved on 12/18/08 during the previous “flight to quality” panic in the (still-running) economic crisis that erupted in 2007. Given this equity and debt support, will things calm down much? No. The economic and political scenery has not sufficiently changed. Relationships within and between various financial arenas and their variables probably will vary to some extent as time passes, but the current entangled key financial factors will remain powerful, volatile, and intertwined. Although there will be occasional intermissions, turmoil in and between key equity, interest rate, currency, and commodity theaters therefore will not cease anytime soon.
Why place blind faith in the 2013 low rate policy, for the Fed confesses it changes its viewpoints? In addition, consider the Fed’s policy track record relative to its “original” expectations. Economic growth has been considerably lower than the Fed “had expected”. The Fed “now expects” a slower pace of recovery. Just as the Fed this month adjusted its policy by speaking of low Fed Funds through mid-2013, it eventually may alter its present course. Historians recall that the Fed’s quantitative easing floods likewise represented policy changes due to marketplace developments. Besides, how accurate were the Fed’s economic forecasts in 2007 and 2008, at the dawn and during the early stages of the acceleration of the economic crisis? So as Fed expectations change, so may its actions, whether on rates, quantitative easing, or otherwise.
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Furious Financial Fluctuations (8-15-11)