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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SEASONS COME, SEASONS GO: US NATURAL GAS © Leo Haviland February 5, 2019

“The Times They Are A-Changin’”, a Bob Dylan song

CONCLUSION AND OVERVIEW

The vicious bear slump in NYMEX natural gas (nearest futures continuation) that started after 11/14/18’s 4.929 peak probably will end between mid-February and early March 2019. Assuming normal weather for the balance of winter 2019, major support around 2.40/2.50 probably will hold. Above-average temperatures for the rest of this winter increase the risk of a  moderate breach of the 2.40/2.50 floor.

Looking forward over the next several months, NYMEX natural gas (nearest futures) probably will remain in a sideways trend between 2.40/2.50 and 3.20/3.45. However, higher than anticipated United States natural gas production, reduced demand due to milder than expected summer weather, or American economic feebleness may inspire an assault on the lower end of that range. Many important lows in nearest futures continuation have occurred in late August/calendar September.

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What is a “low”, “high”, or “normal” (average, reasonable) inventory is a matter of opinion. In any case, over the past two years, the United States natural gas industry probably has shifted toward a lower level of desired (appropriate, reasonable, normal, prudent, sufficient) stock holding relative to long run historical averages. Structural changes in the US natural gas marketplace have encouraged more widespread (and more aggressive) adoption of a “just-in-time” (lower inventories in days coverage terms) inventory management approach instead of a “just-in-case” (relatively higher stockpiles) method.

Why? One likely factor has been faith that gas production (in 2018, 2019, and thereafter) would remain far greater than that of calendar 2017. Many players therefore probably believe there “always (or almost always) will be enough gas around” to satisfy demand, even during peak consumption periods. Another variable likely encouraging lower inventory in days coverage terms is the substantial expansion of America’s pipeline infrastructure. Thus it has (will) become easier to move sufficient gas to many locations where it is needed. In addition, the growing share of renewables in total US electricity generation arguably to some extent reduces the amount of necessary natural gas inventories.

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Assume an entrenched change in natural gas inventory management practices to the just-in-time orientation. Assume also that from the days coverage perspective (stocks relative to consumption), the “reasonable” level of industry holdings has tumbled by several days relative to historical days coverage benchmarks. Nevertheless, anticipated October 2019 (and October 2020) United States natural gas inventories from the days coverage perspective are substantially lower than the historical average. The natural gas inventory situation therefore is somewhat bullish, particularly from the perspective regarding the close of build seasons at end October 2019 and end October 2020.

Suppose US natural gas output does not surpass current expectations, economic growth remains moderate, weather remains normal, and commodity prices in general (especially in the petroleum complex) do not collapse. This natural gas inventory situation, assuming it persists, makes it probable that the marketplace eventually will attack and surpass 3.20/3.45.

Although prospects for US natural gas days coverage at end October 2019 and October 2020 at present currently are fairly bullish, end March 2020 inventories appear sufficient. It consequently may be difficult to sustain moves over 3.45/3.70.

Despite the explosive price leap to nearly 5.000 in mid-November 2018, the shattering collapse from mid-December (12/10/18 high at 4.666), signals that many natural gas marketplace participants probably remain complacent regarding the availability of supplies, even in regard to periods of expected or actual high demand. The current sideways trends and relatively modest price heights for the summer 2019 and winter 2019-2020 calendar strips likewise reflect little worry regarding prospective supply availability 

However, picture a significantly colder than usual winter (or widespread belief this will occur). A colder than normal winter 2019/20 (or winter 2020/21), assuming low end-October days coverage, boosts the risks of very low inventories at the end of winter and thus substantial (even if brief in duration) bull charges. US natural gas inventories were very low in days coverage terms at end-October 2018. Fears that available supplies (whether in days coverage or arithmetical terms) are or may become tight can prompt feverish scrambles to procure them. Recall the spike from 9/10/18’s 2.752 and 10/29/18’s 3.100 up to November 2018’s summit. In any case, the most probable time for any flight toward or above 4.00/4.10 is close to or during winter.

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Seasons Come, Seasons Go- US Natural Gas (2-5-19)

US NATURAL GAS: WAITING FOR FIREWORKS © Leo Haviland July 3, 2018

“(All down the line.) We’ll be watching out for trouble, yeah.”
The Rolling Stones, “All Down the Line”

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CONCLUSION

NYMEX natural gas (nearest futures continuation) probably will remain in a sideways trend between 2.40/2.50 and 3.20/3.45 over the next few months. However, United States natural gas inventories from the days coverage perspective (stocks relative to consumption) are much lower than the historical average. Suppose economic growth remains moderate and that commodity prices in general (and those in the petroleum complex in particular) do not collapse. This natural gas inventory situation, assuming it persists, makes it probable that the marketplace eventually will ascend over 3.20/3.45 toward major resistance around 4.00/4.10. The most likely achievement of a flight to 4.00/4.10 is around winter, whether that of winter 2018-19 or thereafter. A colder than normal winter (or even belief such will occur) boosts the chances of such a spike. If widespread expectations of upcoming massive US natural gas production increases are disappointed, that also likely will rally prices above 3.20/3.45 and toward 4.00/4.10.

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Over the past year or two, the natural gas industry probably has shifted toward a lower level of desired (“appropriate”, “reasonable”, “normal”, “prudent”, “sufficient”) stock holding relative to historical averages. Why? One factor probably is faith that calendar 2018 (and subsequent) gas production will remain far over that of calendar 2017. So many players probably believe there “always (or almost always) will be enough gas around”. Another variable likely encouraging lower inventory in days coverage terms is the substantial expansion of America’s pipeline infrastructure. Thus it has (will) become easier to move sufficient gas to many locations where it is needed. Moreover, the growing share of renewables in total US electricity generation arguably to some extent reduces the amount of necessary natural gas inventories.

These structural changes in the US natural gas marketplace apparently have shifted the natural gas inventory management approach to more of a “just in time” (lower inventories) relative to a “just in case” (higher stockpiles) method.

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However, the natural gas inventory situation nevertheless appears somewhat bullish. Even if the “reasonable” level of industry holdings of natural gas inventories has tumbled relative to historical benchmarks in days coverage by a few days, prospective levels for October 2018 and October 2019 nevertheless appear “low” relative to “normal” totals, particularly from the perspective of the winter stock draw period.

Arguably many natural gas marketplace participants are overly complacent regarding the availability of supplies, particularly in periods of high demand. Imagine a colder than normal winter. Emerging worries that available supply (whether in days coverage or arithmetical terms) is or may be tight can inspire heated scrambles to procure it.

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Energy Information Administration (“EIA”) statistics indicate that calendar 2019 US liquefied natural gas (LNG) net exports will be substantial (notably higher than net LNG exports in 2017 and 2018). This net foreign demand for LNG will tend to tighten the US inventory situation. Also note that in calendar 2017 and 2018, America was a net importer of natural gas via pipeline; in calendar 2019, the US becomes a net exporter via pipeline.

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US Natural Gas- Waiting for Fireworks (7-3-18)

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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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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