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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PARALLELS IN US NATURAL GAS: 2012 AND 2016 BUILD SEASONS © Leo Haviland, July 4, 2016

OVERVIEW AND CONCLUSION

Cultural viewpoints (including variables selected, organized, and assessed) regarding the past and present or focused on an anticipated future reflect opinions, not science. Moreover, marketplaces “themselves” are not unchanging or Natural phenomena. In any case, marketplace history does not necessarily repeat itself, whether entirely, partly, or at all.

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The United States natural gas build season spans roughly from the end of calendar March to the end of calendar October. America’s natural gas 2016 inventory build season, including its price trends, although it has several more months to run, nevertheless presents several parallels with 2012’s build season. Assuming inventory forecasts for the balance of the 2016 build season come true, one crucial similarity between 2012 and 2016 will be substantially diminishing US natural gas oversupply over the course of build season.

The winters of 2011-12 and 2015-16 not only ended with massive supplies, but also completed long-running major bear trends. In commodity arenas, all else equal, and absent some revolutionary developments on the supply or demand side, there is some tendency for gigantic oversupply (mammoth inventories) accompanied by sustained depressed prices eventually to be reversed by falling production, increasing demand, or both. In natural gas, if prolonged bullish weather patterns appear (such as a torrid summer or frigid winter), they obviously can help to minimize the bearish oversupply situation or transform it to a bullish one.

Also, although natural gas price trends do not always closely intertwine with those of the petroleum marketplace (or commodities “in general”), or with other financial playgrounds such as stocks, currencies (especially the US dollar), and American government and other benchmark interest rates, they can entangle with them. In second half 2012, important stock and commodity marketplaces rallied and the dollar paused in its appreciation. In mid-first quarter 2016, a similar “overall” phenomenon occurred. In both time periods, ongoing or anticipated (eventual) monetary easing by key central banks likely assisted the bull moves in stocks and commodities, including natural gas.

Finally, at times the CFTC’s Commitments of Traders reveals patterns for noncommercial participants (investors, speculators) in natural gas relevant for assessing price trends. The net noncommercial positions in the later stages of the bear trends which ended in 2012 and 2016 present roughly similar patterns.

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From the historical distance (price move) perspective, ten major NYMEX natural gas bear moves prior to 2014-16’s tumble traveled an average of 65.9 percent. For the seven collapses beginning with the December 1996 one, the average downturn is 70.4pc. From the time parameter, the average decline for the 10 big bear moves was about nine and three-quarter months. For the most recent seven major bear moves preceding the one that began in February 2014, the duration averages about eleven and one-quarter.

The collapse from 2/24/14’s 6.493 major high to 3/4/16’s 1.611 low was 75.2 percent and just over 24 months. Thus the price move traveled moderately farther than average. Significantly, the two year decline since February 2014’s summit was more than twice as long as average major bear trends, surpassed only by the January 2010 to April 2012 crash (during which the price fell 68.9pc). Thus from the interrelated price and time variables (nearest futures continuation basis), and though history is not destiny, a major change from the long-running bear trend that commenced in February 2014 probably occurred following 3/4/16’s low.

Also note that March 2016’s 1.611 level stands within a range of other important support. Recall not only 4/19/12’s major low at 1.902, but also the double bottom of 1.85 (1/28/02)/1.76 (9/26/01), a trough at 1.735 on 9/5/96 alongside a low at 2/24/97 at 1.68, and 1998-99’s bottom (8/27/98 at 1.61/2/26/99 at 1.625). Also, the March 2016 trough did not break 12/18/15’s interim low at 1.684 by much.

Moreover, from a calendar day viewpoint, March 4 is within several days of the February dates for the important late February bottoms of 1997 (2/24/97 at 1.68) and 1999 (2/26/99 at 1.625). In addition, the March 2016 low is a two year diagonal time move relative to the late February 2014’s pinnacle.

“US Natural Gas: Traveling Forward” (6/13/16) emphasized: “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. 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 [the significant resistance range of] 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.”

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Parallels in US Natural Gas- 2012 and 2016 Build Seasons (7-4-16)

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)

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)