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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THE OIL BATTLEFIELD: EVOLUTION, RELATIONSHIPS, AND PRICES © Leo Haviland, April 10, 2017

In “Street Fighting Man”, The Rolling Stones sing:
“Everywhere I hear the sound of marching, charging feet, boy
‘Cause summer’s here and the time is right for fighting in the street, boy”.

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OVERVIEW AND CONCLUSION

The continued determination of leading OPEC members (such as Saudi Arabia) and some key non-OPEC oil producing nations (such as Russia) to subdue their crude oil output will underpin petroleum prices. The Saudis and their allies will not readily sacrifice their long-sought production restraint agreement achieved with several important non-OPEC exporters in late 2016. Assuming supply discipline by key producers and moderate global economic growth, supply/demand estimates indicate that OECD (advanced nations such as the United States) industry inventories by the end of calendar 2018 will have declined to around “normal” levels in days coverage terms.

Even gigantic producers such as Saudi Arabia and Russia (for political as well as economic reasons) need to generate at least moderate income. Given its planned sale of shares in Aramco via an initial public offering, does Saudi Arabia want a renewed collapse in petroleum prices to $40 Brent/North Sea or less? Given its need for revenues, global political ambitions, and signs of domestic unrest, does Russia want petroleum prices to plummet sharply?

Other political worries help to bolster oil prices. Some (as usual) relate to the Middle East. North Korea’s nuclear program captures headlines. What if Venezuelan political turmoil results in a supply interruption?

However, current OECD petroleum industry inventories remain far above average. Even by end calendar 2017, they probably will be several days above normal. And end calendar 2018 obviously is a long time from now. Compliance with the OPEC/non-OPEC output guidelines by several individual countries has not been universal. And going forward, production discipline should not be taken for granted. Will Iraq and Iran moderate their production? What if Nigerian or Libyan production increases? Also, the net noncommercial position in the petroleum complex, which played a very important part in the explosive oil bull move in oil that began in first quarter 2016, is still quite high and vulnerable to liquidation.

History reveals that petroleum price levels and trends intertwine with currency, interest rate, stock and other commodity marketplaces (particularly base and precious metals) in a variety of ways. The current interrelationship between petroleum and these other arenas probably warns that it will be difficult for petroleum prices to sustain advances much above their first quarter 2017 highs.

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Using NYMEX crude oil (nearest futures continuation) as a benchmark, petroleum prices for the next several months likely will stay in a broad range. Major support exists at around $38.00/$42.00. Significant resistance exists between $52.00/$55.25.

However, assuming ordinary international economic growth, what if OPEC/non-OPEC production discipline continues for the next year and a half (or marketplace faith increases that such restraint will persist)? In this scenario, if (and this “if” is a very important if) no sustained significant weakness in global stock marketplaces (and intertwining/confirming patterns in the US dollar, interest rates, and metals) develops, then NYMEX crude oil prices probably will attack the $60.75/$65.00 range.

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The Oil Battlefield- Evolution, Relationships, and Prices (4-10-17)

CASH AND CAPITAL CACHES © Leo Haviland, March 6, 2012

Everyone knows that money shifts into, within, and between geographic regions and broad financial sectors (stocks, interest rates, foreign exchange, commodities, real estate) sometimes are substantial or even “dramatic”. Price movements and other statistics indicate this. However, seldom is it underlined how gigantic capital marketplaces are.

Would it matter much if American stocks weakened on a sustained basis around ten percent? Such an US equity decline is a noteworthy absolute sum and large from the GDP and net worth perspective as well. US stock marketplace capitalization at end 2010 was $17.3 trillion. Suppose one uses 2011 US GDP at around $15.1tr (Bureau of Economic Analysis; the 2010 level in the IMF table is $14.5tr). A ten percent equity dive equals about 11.5pc of GDP (1.73/15.1 trillion).

Take another view using Federal Reserve data. According to the Federal Reserve’s “Flow of Funds” (Z.1, Tables B.100.e and B.100; 12/8/11, next release 3/8/12) 2Q11’s equity shares for households (and nonprofit organizations) were about $19.2tr. A ten percent equity dive equals around 12.7pc of GDP (1.92/15.1). End February 2012 US stock valuations probably are roughly around that 2Q11 total. A ten pc slump in stocks (using US equities as the benchmark for all stock holdings by US households) of $1.92tr equals around 12.7pc of 2011 nominal GDP (1.92/15.1), or around 3.2 percent of 2Q11’s household net worth of just under $60 trillion (3Q11 $57.4tr is most recent Z.1 information). US end 3Q11 household net worth still remains beneath end 2007’s over $65.1tr.

With consumers around 70 percent of the US economy, the Fed’s assorted accommodative monetary policies during the ongoing worldwide economic crisis that emerged in 2007 have sought to boost (and sustain rallies in) equity prices.

However, what does the fairly strong TWD in 1Q09 versus its April 2008 trough alongside the absence of any significant increase in the percentage of worldwide US dollar holdings over that time span indicate? It strongly suggests that something more may have been going on in (“behind”) these official reserve patterns than the consequences of US dollar appreciation. A reasonable conjecture is that it reflects a determination by developing/emerging nations in general not to expand their exposure to the US dollar. Given the longer run trend of their declining US dollar claims, they even arguably are trying to reduce their US dollar claims regardless of dollar fluctuations.

Note the recent coincidence in time of a bottoming of yields in the “flight to quality” destination. Compare the 10 year government notes of the United States, Germany, and Japan. Recent UST 10 year note lows were 1.67pc on 9/23/11 and 1.79pc on 1/31/12. The Japanese JGB 10 year low was 1/16/12 at .94pc (compare JGB bottoms at .83pc 10/7/10, .44pc 6/11/03, and .72pc 10/2/98). The German 10 year government note valley at 1.64pc on 9/23/11 was the same day as the UST note one. It made another trough at 1.74pc on 1/13/12 (about the time of Japan’s mid January 2012 low), as well as one at end January (1.78pc on 1/31/12; compare US 10 year).

Suppose there is some inflation, and that low nominal yields result in very low real (or even negative) yields. In the absence of another round of flight to quality concerns, how eager will official and private players be to own (or at least to be substantial net purchasers going forward) of government debt of these nations?

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Cash and Capital Caches (3-6-12)

OIL AND TROUBLED ECONOMIC WATERS © Leo Haviland, August 8, 2011

Petroleum prices will remain in a sideways to down trend. At least in the OECD, industry inventory in days coverage terms is currently higher than average. Due to renewed economic weakness and still relatively lofty oil prices, petroleum demand for the balance of 2011 and calendar 2012 probably will be less than many believe. Thus days coverage in the petroleum world probably will remain adequate for some time.

Petroleum remains partially hostage to variables of and trends and levels in key equity, currency, and interest rate (and other commodity) battlefields. Equity declines seem to be intertwining with those in the petroleum complex. Consumer balance sheets and incomes in the United States and many other nations remain under pressure. Substantial fiscal deficits (US, several European nations, perhaps Japan) undermine stock marketplace strength. A weak US dollar has convinced many that equities as well as petroleum prices should inevitably keep climbing, or at least stay high. However, a very (especially) weak US dollar situation- which seems to be emerging these days- may coincide with both feeble stocks and falling petroleum prices.

Petroleum bulls underline that if the economic recovery retains strength, supplies could get fairly tight unless OPEC raises its production quite a bit. Admittedly, as the Libyan situation shows, there’s always a chance that some event will significantly interrupt supplies. Some petroleum players therefore prefer to keep a handful of extra inventory around “just-in-case”. Alternative investment by noncommercial players has not evaporated. Some observers have faith that if the American economy weakens substantially, the Fed will engage in a third wave of quantitative easing (money printing) which would rally petroleum prices in nominal terms.

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Oil and Troubled Economic Waters (8-8-11)

DESPERATE HOUSEWIVES (EPISODE 10) – INSIDE THE PETROLEUM JUNGLE © Leo Haviland, April 5, 2011

Not only does recent Middle East political turmoil flood the news. Actual supply interruptions, as well as conjectural ones, of course influence petroleum and other trading and hedging behavior.Increasing petroleum consumption in non-OECD (developing) nations, though it is challenging to measure, is a bullish factor. There’s probably been a shift within the petroleum industry from a rather confident “just-in-time” orientation to a more fearful “just-in case” bias regarding preferred levels of inventory holding. Moreover, keep in mind the continued bullish effects of the weak United States dollar, low policy interest rates in America and many other OECD nations, noteworthy quantitative easing (money printing), and the global economic recovery story in general and associated rallies in stock marketplaces. Moreover, to many soothsayers onWall Street and beyond, commodities (particularly petroleum) are a new asset class. This faith inspires “alternative investment” (buy and hold for the long run) in that universe, thus tightening petroleum free supply and pushing prices higher.

By around calendar 1996, US petroleum statistics suggest a move to lower inventory holdings in days coverage terms, probably at least due to widespread faith in the appropriateness of just-in-time inventory management.

So the longer that US (and OECD) holdings such as those of March 2011 remain high relative to the 1996-10 period, the more it seems that there has been a partial shift (by at least some industry members) to a just-in-case approach. Given what may happen in the oil world, why not hold a bit more around “than usual”. Players may grab an three or four days extra now relative to just-in-time needs, as versus say 10 or more days in the distant past.

Both the 2008 and 1987 eras hint that any major (final) high in the petroleum complex will be fairly near in time (within a few months, either before or after) one in United States equities.

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Inside the Petroleum Jungle (Desperate Housewives, Episode 10)