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: ON THE ROAD © Leo Haviland August 2, 2015

The probable avenue for the United States natural gas marketplace (NYMEX nearest futures continuation basis) for the next several months is a range between 2.15 and 3.40. The major bear trend that followed 2/24/14’s major peak at 6.493 attained a key bottom with 4/27/15’s 2.443 low. Was this a major low? Perhaps, but prices probably will challenge that level again and perhaps modestly break it over the next several months.

But why? After all, assuming normal weather, current and anticipated upcoming natural gas days coverage through winter 2015-16 tend to support prices, particularly in the context of NYMEX natural gas prices well under 4.00. Historical analysis indicates the bear trend from February 2014 to April 2015 travelled sufficiently far in price and duration terms to justify a shift to a neutral to bullish outlook. Also, the last prior major low, 1.902 on 4/19/12, likewise occurred in calendar April. Many key bottoms have occurred around contract expiration. In addition, many significant marketplace trend changes in natural gas (and petroleum) roughly coincide with very elevated net long or short noncommercial positions. From the historical perspective, the net noncommercial short position was very large around the time of April 2015’s low; the net noncommercial length likewise was substantial around the time of the February 2014 peak.

Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” factors. However, especially since mid-to-late June 2014 and into calendar 2015, bearish natural gas price movements have intertwined with those in the petroleum complex and the bull move in the broad real trade-weighted US dollar. The retreats since their spring 2015 highs in the commodities complex in general and petroleum in particular fit with similar slumps in natural gas. Petroleum likely will remain weak and the US dollar will remain strong for the near term, which will be bearish factors for American natural gas prices.

Quite a few marketplace observers believe the US natural gas marketplace will have massive inventories at the end of calendar 2016 build season (end October). This bearish perspective also weighs on prices. Although such oversupply probably will not occur (assume normal weather), such views are not unreasonable.

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US Natural Gas- On the Road (8-2-15)

OIL’S TROUBLED WATERS © Leo Haviland May 18, 2015

Where will petroleum prices voyage over the next several months? Although it is a difficult call benchmark NYMEX and Brent/North Sea crude oil prices probably are establishing a broad range. For NYMEX crude oil (nearest futures continuation), the range is roughly between $40-$45 and $65-$75 per barrel. On balance, crude oil prices probably will venture more to the middle to lower section of that range.

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Petroleum’s supply/demand scene appears especially unsettled and uncertain. Navigating through that territory is challenging. However, “by itself (all else equal)”, the oil picture nowadays and for the near term looks bearish. Is OPEC’s new policy of reducing high-cost (non-OPEC) production succeeding? Not much so far. Despite the dive in drilling rig counts, OECD days coverage levels and the worldwide supply/demand balance for 2015 reveal plentiful petroleum.

Worldwide petroleum inventories generally are lofty and likely to remain so for the next several months. Though global oil consumption will edge up alongside rather modest economic growth, supply probably will exceed demand. Suppose benchmark Brent/North Sea prices (spot; or nearest futures continuation) sustain levels over $50 (and perhaps even $45) per barrel. Suppose non-OPEC production remains relatively high. Then OPEC, led by Saudi Arabia, probably will not alter its current output policy aimed at capturing market share and reducing actual and planned high-cost production in the United States and elsewhere.

Within OPEC, and apart from the policies of Saudi Arabia and its Gulf States allies, production developments from several important nations remain conjectural. Consider Iran, Iraq, and Libya. For example, predicting the outcome of the Iranian nuclear negotiations is hazardous. But even if the talks drag out beyond the end of June 2015, they probably will have a relatively successful conclusion resulting in increased Iranian crude oil production. Iraqi output, despite its civil strife, probably will keep rising. Due to the Libyan civil war, production there currently has little room to fall further. Might it spout higher if a peace agreement is reached? Will Nigeria and Venezuela maintain their current production levels?

Noncommercial participants in petroleum playgrounds also influence oil price trends. Over the past several months, a substantial increase in the net noncommercial long position has helped to propel petroleum prices upward. However, given the oversupply situation in the petroleum battlefield, the net noncommercial length arguably is vulnerable. Its liquidation consequently will pressure oil prices lower.

Uncertainties for marketplace variables “outside” the oil patch of course intertwine with those inside it. These factors appear particularly tumultuous and complicated nowadays, making it especially difficult to forecast petroleum price trends and levels. Petroleum supply/demand and prices are hostage not only to economic growth trends, but also to movements in interest rates, stocks, and foreign exchange. Policies of the Federal Reserve, European Central Bank (currently engaged in massive money printing) and other major central banks matter. Will the Fed ever raise interest rates? What if American stocks ever slump more than ten percent? US dollar weakness in the past few weeks probably has supported oil prices. What if the broad real trade-weighted dollar renews its bull move?

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Oil's Troubled Waters (5-18-15)

ROLLIN’ AND TUMBLIN’ IN US NATURAL GAS © Leo Haviland April 20, 2015

In all marketplace battlefields, a wide variety of storytellers select between (and emphasize differently) an array of variables. They thereby generate diverse bullish and bearish arguments that heatedly compete for allegiance and action. And analysis and trading always are difficult enterprises. However, in the United States natural gas universe nowadays, the noise, smoke, and uncertainty produced by these diverse variables and conflicting perspectives and recommendations make it especially challenging to boldly swear unquestioning loyalty to a particular marketplace viewpoint.

What does historical analysis of major United States natural gas bear marketplace moves (NYMEX nearest futures continuation basis) in the context of days coverage reveal regarding the ending of the major bear trend that emerged in late February 2014? Perhaps 4/13/15’s 2.475 low was an important trough; however, several days of course remain in April and many key bottoms have occurred around contract expiration. If a noteworthy bottom is not established in calendar April 2015, the most probable time for a major low is in late August/calendar September 2015. NYMEX natural gas reached many important bottoms in late calendar August and September. However, a final low in late summer 2015 would stretch out the February 2014 bear marketplace trend substantially longer than the historical average.

In any case, if NYMEX natural gas prices pierce 4/13/15’s low (nearest futures continuation), that level probably will not be broken by much. Substantial support lurks around 2.40 and 2.20/2.15.
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End March 2015’s 20.0 days of coverage (1471bcf divided by about 73.5bcf/day of full calendar year 2014 consumption), though way up from March 2014’s 12.0 days coverage, dips slightly under the 21.8 days end March 1990-2014 average. It also falls a notable, though not extreme, 4.1 days beneath the nine year 2006-14 average. Thus despite the notable arithmetic stock increase during calendar 2014 build season, the national days coverage inventory picture at the end of winter 2014-15 draw season is slightly bullish.

What’s the bottom line in regard to the natural gas bear trend that began in February 2014 if one concentrates on the natural gas inventory variable? With the NYMEX nearest futures natural gas price currently well under 4.00, this end winter 2014-15 inventory factor “taken by itself”, looks neutral to supportive for gas prices. This fundamental consideration should be interpreted alongside the marketplace history relating to price and time factors.

End October 2015’s 49.5 days coverage level slides 6.3 days beneath the 2006-14 end October average of 55.8 days and 4.1 days under 1990-2014’s 53.6 days. This end October 2015 days coverage total therefore is bullish (even if not wildly so given prospects of increased natural gas production).

Look further out in the murky future to March and October 2016. Although much of course can happen between now and then, potential days coverage nevertheless does not suggest notable oversupply relative to historic averages.

The EIA forecasts end March 2016 inventory at 1704bcf and end October 2016 stocks at 3923bcf. Days cover at end March 2016 will be around 22.3 days (1704bcf/76.3bcf/d). Though this is slightly (.5 day) above the 21.8 day 1990-2014 average, it is 1.8 day less than 2006-14’s 24.1 day average. October 2016’s hypothetical days coverage is 51.7 days (3923bcf/75.8bcf/d. This is about 1.9 days under the 1990-2014 average for that calendar month and 4.1 days beneath 2006-14’s 55.8 day average.

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Rollin' and Tumblin' in US Natural Gas (4-20-15)

US NATURAL GAS: DRAWING CONCLUSIONS © Leo Haviland February 17, 2014

United States natural gas inventory days coverage probably will be quite low at the end of the 2013-14 winter draw season. The NYMEX natural gas complex includes not only the nearest futures continuation benchmark, but also actual calendar months and actual seasonal (summer; winter) and calendar year strips. These various marketplaces do not necessarily all travel in the same fashion. Yet assuming normal weather for the balance of this winter, the NYMEX natural gas complex “in general” probably will continue its major bull move.

Given the expected low days coverage in US natural gas inventories by end March 2014, it would be unsurprising if the NYMEX nearest futures continuation contract significantly challenged major resistance around 6.10 (recall the January 2010 pinnacle). However, as winter ends and the nearest futures natural gas contract becomes a springtime one (such as April 2014 or May 2014), sustained moves in the front month contract over 6.10 will be difficult (at least in the near term). The supply/demand situation for the actual March 2014 gas contract (the current nearest futures) is not quite the same as that for the May 2014 one (when inventories are building). If colder than normal weather occurs during the balance of this February and March, a spike above the 610 summit (even if it does not last very long) is probable.

Admittedly, the NYMEX natural gas complex is vulnerable to a rather significant price decline from recent tops. Suppose weather for the balance of this winter season is warmer than normal; that may help to inspire a price drop.

However, even with normal weather, interim price declines may occur. Although the current inventory situation in US natural gas displays rather low days coverage relative to consumption, the shortage will become less severe during calendar 2014 as a whole due to a year-on-year rise in production and fall in demand.

Though the April through October 2014 build season probably will reduce the existing significant days coverage shortfall, it will not eliminate it. Since days coverage for the next several months (through the 2014 build season at least) probably will remain somewhat below normal, this will tend to support prices in the NYMEX natural gas complex in general.

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US Natural Gas- Drawing Conclusions (2-17-14)
Charts- NYMEX natural gas (3 charts, for essay US Natural Gas- Drawing Conclusions) (Feb 17, 2014)