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: THE OUTER LIMITS © Leo Haviland October 21, 2013

For the benchmark NYMEX natural gas contract, most traders, “investors”, hedgers, and the media focus closely on the significant price travels and levels of the rolling nearest futures continuation contract, or on the current actual front month contract (such as November 2013). Some marketplace watchers extend their attention to the next several months (as in the winter 2013-14 or summer 2014 gas calendar strips), or perhaps a year out from any given current time. Relatively few clairvoyants outside of a relatively small handful of natural gas and electricity professional insiders intensively examine the price action and levels of forward months over a year out, as in the NYMEX calendar 2015, calendar 2017, and calendar 2020 natural gas strips.

Distant time horizons in financial and commodities marketplaces are not islands apart from the spot (physical) and near term periods. Therefore surveying the price flights, dives, and levels of such “outer limit” time horizons within the NYMEX natural gas marketplace complex provides insight into trading spans (forward marketplaces) close to the current time.

The current sideways trend for NYMEX nearest futures natural gas to some extent encourages a similar pattern in that universe’s distant year periods. The wide-ranging uncertainty relating to NYMEX natural gas’s distant period supply/demand situation- including liquefied natural gas export volumes, the extent of United States economic and electricity demand growth, and issues relating to coal and renewables- to some extent encourages the persistence of a sideways trend for the long run horizon, and thus for NYMEX nearest futures continuation.

What’s the overall current trend for NYMEX distant month natural gas marketplaces such as the NYMEX 2015 and following year calendar strips? On balance, though these assorted calendar strip arenas are at different price levels and do not have exactly the same supply/demand situation, on balance these are in a sideways to down trend, not just a sideways one. Assuming normal weather for upcoming winter 2013-14, although nearest futures continuation will remain trapped in its broad range, nearest futures probably will drift lower from current levels, with a significant chance of challenging its calendar 2013 depths around 305/313. This probably will encourage a renewed test and probable breaking by the calendar strips of 2015 and thereafter of their April (or June, in some cases) 2012 bottoms (which are comparable to those achieved, depending on the calendar strip, in early August 2013 or thereafter). Note that even if America’s LNG exports may be potentially large, any such actual (noteworthy) exports probably will not occur for at least around another couple of years from now.
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These 12 electricity charts cover six hubs (PJM West, Mass Hub, Ercot North, SP 15, Palo Verde, and MidC) for winter 2013-14 (using January 2014 and February 2014 months) and the 2014-17 calendar strip (all four years, all months combined). The electricity chart commentary interrelates with viewpoints on NYMEX natural gas.
The assorted US electricity hubs do not always tell the same or even almost the same tale. In a particular electricity region, the perspective regarding seasons (including their supply/demand) are not always identical; summer may look much different than winter. The US electricity theater and its scenery of course is not exactly the same as that of natural gas. And the electricity and natural gas relationships for a given geographical region can vary, sometimes dramatically, from those elsewhere.
NYMEX natural gas started an important bear trend in spring 2013 (see, for example, the nearest futures continuation marketplace double top high of 4/18/13 at 4.429 and 5/1/13 at 4.444). It is a noteworthy story that price declines since late May 2013 in various electricity hubs for both winter 2013-14 and the calendar 2014-17 strip coincide with (actually, shortly preceded) the interim bear stage in NYMEX natural gas that commenced 5/28/13 (nearest futures 4.308). Since late May 2013, natural gas “in general” has not been tumbling lower on its own; the overall US electricity situation has closely intertwined with and encouraged it.
Note that according to the EIA, US total electricity consumption rises merely .7 percent in calendar 2013 versus calendar 2012. The EIA predicts American electricity demand in calendar 2014 climbs only about one percent relative to 2013 (Short-Term Energy Outlook, July 2013, Table 7a).

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Electricity Chart Analysis- a Scenic View (7-17-13)

US NATURAL GAS- OFF IN THE DISTANTS © Leo Haviland, January 14, 2013

In commodity marketplaces, the price level and fluctuations of the spot (physical, cash) world and nearby (front) months generally attract and fascinate us more than periods (distant month contracts) out in the seemingly more misty future. In recent history, bull and bear moves in distant period NYMEX natural gas contracts to a substantial extent have mirrored those in the nearby months. Patterns in NYMEX natural gas strips, whether seasonal ones such as summer 2013 or calendar years such as 2014, 2015, and 2016, significantly resemble those of actual nearby months (and the nearest futures continuation contract perspective). For example, after marching upward and achieving peaks in spring 2011, they eventually fell off together, reaching dismal valleys in April 2012. The front months and distant spans then ascended dramatically, although not exactly the same distance. After this climb, they began to retreat together; recall the descent since late November 2012 (some trading periods started to fall off in price in October). The nearby and distant month trends thus have generally “confirmed” each other.

Nevertheless, any given natural gas near term situation is not always or necessarily the same as that of the more distant future (or ancient history) times. Because natural gas is not a cost of money commodity like gold, this similar directional relationship between spot (and front month) and forwards off in the distance is neither unchanging nor guaranteed. Some divergence may develop. Therefore marketplace players should monitor trends in NYMEX distant month natural gas contracts in addition to those of actual nearby months (and first futures continuation).

The long run major bull trend of the NYMEX natural gas complex that began in April 2012 (as represented by the nearest futures continuation bottom around 190 on 4/19/12) remains intact. However, at present the near term bearish retracement move for both nearby as well as distant month forwards such as the summer 2013 strip and the calendar strips of more faraway years also likely remains in place. See the nearest futures continuation high on 11/23/12 at 393.

The interim decline in natural gas that commenced during fourth quarter 2012 probably is near in time to at least an initial end. Assuming normal winter weather, the most likely time for this bearish NYMEX natural gas pattern to cease is in late calendar January or late calendar February 2013 (probably around nearest futures expiration). In any event, the price (nearest futures continuation basis) will not easily sustain falls beneath the 300 to 285 range (note recent lows on 1/2/13 at 305 and 1/9/13 at 309). Warmer than normal weather (as in last winter) could postpone the low (recall the late April 2012 depth). Given the likelihood of above normal US natural gas inventories in days coverage terms, there remains a significant chance of a final (second, double) bottom in late August or calendar September 2013.

As there are regional differences (basis relationships) between natural gas marketplaces, players should not restrict this comparative approach to NYMEX natural gas. Why not analyze near term relative to far out periods natural gas at a variety of different locations (and review related basis relationships over these vistas)? Also, given the links between natural gas and electricity fields, analysis of electricity marketplaces in more distant months in a given region offers insight into near term electricity trends as well as distant month (and even near term) natural gas battlegrounds.
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US NATURAL GAS IN WINTER 2012-13: DRAWING CONCLUSIONS © Leo Haviland, December 17, 2012

The current bear trend in US natural gas (NYMEX nearest futures continuation basis) that began in late November 2012 at 393 will continue. Assuming normal cold winter weather, the price probably will slump to around the 300 to 285 range. When will the price quit sledding downhill? Though it may only be an initial significant bottom, look for an important low in calendar January or February 2013, probably around futures expiration.

End October 2012 inventories were around 3923bcf according to the EIA barometer (Short-Term Energy Outlook, December 2012; “STEO”). Therefore end October’s 56.3 days of coverage rest about 2.6 days above the 53.7 day long run (1990-2011) average. Though not a big overload relative to that long run average, it is sufficient to place some burden on prices.

Moreover, look at the likely increasing relative oversupply in days coverage terms versus the 1990-2011 average for the given calendar month as time passes from end October 2012 to end March 2013. At end March 2013, forecast inventories of 1873bcf (December STEO, Table 5a) represent about 26.9 days coverage (1873bcf divided by 69.70bcf/d). This jumps about 4.7 days over the 22.2 day long run average for that month, more than October’s 2.6 days.

Suppose end March 2013 inventories are 1800bcf. The excess relative to the long run average is 3.6 days (25.8 less 22.2). This still hovers above the 2.6 day end October 2012 difference.

Despite the ongoing near term downtrend, and absent another very mild winter akin to 2011-12’s, a NYMEX natural gas price collapse close to the 190 abyss of April 2012 (or even the 1/23/12 and 6/14/12 depths near 220) is unlikely.

Based on 2012’s substantial switching from coal to natural gas, particularly in the electric power territory, natural gas demand probably will mount if prices sustain levels beneath (roughly) 275. In addition, another factor probably will mitigate price declines. Concentrate on days coverage holdings in recent years.

The desired level of natural gas inventory holding in recent years arguably has climbed relative to that long run average. Consequently the oversupply of October 2012 through March 2013 probably is less than many observers believe.


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US Natural Gas in Winter 2012-13- Drawing Conclusions (12-17-12)
Natural Gas Chart (NYMEX nearest futures) (12-17-12)