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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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- A WINTER’S TALE © Leo Haviland January 12, 2014

The broad range for natural gas (NYMEX nearest futures continuation) over the medium term (extending beyond the balance of this winter 2013-14) remains roughly 280/310 to 490/520. Many players view “around 350” as a near term equilibrium price. Why is there substantial support around 300? Note the 305 low on 1/2/13 (and the gap relative to the 3.046 high on 9/26/12), the 313 lows of 2/15/13 and 8/8/13, and that a 33 percent fall from the 453 high is about 302.

But what about gas prices specifically for the balance of winter 2013-14? Assuming normal weather and moderate American economic growth, the natural gas trend for the remainder of the current draw season probably is about 340 to 453 (the 12/23/13 top; the 5/1/13 high was 444). Inventory from the days coverage perspective has fallen sufficiently to support prices at higher levels than the longer run 280/310 bottom. Around 338 was the 11/5/13 rally take-off point; 340 is a 25pc tumble from the 453 high.

The current low days coverage level of gas inventory nevertheless implies a warning that a break above the December 2013 summit is not out of the question. Suppose (even if this is relatively unlikely) the US suffers through colder than normal weather for the rest of winter 2013-14, and that overall inventories consequently decline significantly relative to average trends. A five percent break over the December 2013 high gives about 476, a 10pc one 499 (498 was the 6/9/11 high. Recall 2010’s 6/16/10 top at 520 and 8/2/10’s around 501; a 50pc rally from the 11/5/13 point is about 507. If severely cold weather is sustained for a rather long time, then six dollars or higher may ensue, even if only on a brief spike. Keep in mind 1/7/10’s 611 pinnacle.

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US Natural Gas- a Winter’s Tale (1-12-14)

US NATURAL GAS TRENDS: BOTTLED UP (c) Leo Haviland September 30, 2013

What is the outlook for United States natural gas prices (NYMEX nearest futures continuation)? Assume normal weather. From now through winter 2013-14, and probably for at least several months thereafter, the marketplace will be trapped in a sideways pattern.

From now through winter 2013-14, near term (on balance) bearish considerations and longer term (net) bullish ones intertwine to bottle up US natural gas prices. The American natural gas supply/demand situation from the production and consumption sides for the remainder of 2013 and calendar 2014 on balance is slightly bearish. Inventory days coverage becomes somewhat more bearish at end March 2014 relative to end October 2013. Natural gas demand from the key electric power sector arguably will not ascend much in the near term unless prices sustain dips under 350. Electricity demand for calendar 2014 grows very little year-on-year. To what extent will increasing supplies of energy from renewable sources put a lid on gas demand?

However, substantial US LNG exports represent a key bullish prospect for the relatively distant future. Coal plant retirements should underpin natural gas prices over the long run. The nation does not appear to be rushing to construct new nuclear power facilities. Although Mexico is currently a modest outlet for American gas exports, it is a growing one. Over the long run, what about demand for natural gas powered vehicles?

Recall spring 2013’s important highs just under 445 (4/18/13 at 443; 5/1/13 at 444) as well as the significant lows around 305 to 313 (305 on 1/2/13; 313 on 2/15/13 and 8/8/13). Between now and the close of winter 2013-14, the broad price range probably extends from roughly 280/310 to 440/460. Around 350 is a so-called equilibrium point within this price tunnel. It will take abnormal weather to provoke breaks of the extremes of this range during winter 2013-14, especially the high end (or beneath 280). Assuming this upcoming winter is neither unusually warm nor surprisingly cold, in general this price band probably will persist for at least a few months after winter departs. However, within the next several months, a test of the NYMEX nearest futures calendar 2013 lows around 305/313 is probable.

In any event, the long term price pattern for natural gas is sideways as well, though the top of the range probably extends to around 500/530 (or higher), with the amount of LNG exports, the extent of natural gas production increases at higher price levels (particularly at 400 and up), and the extent of US economic growth being crucial considerations.
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US NATURAL GAS PRICE ARCHITECTURE (c) Leo Haviland, July 11, 2013

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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