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 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)
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)
The European Central Bank’s magnificent march into full-scale quantitative easing captivates cheerleaders hoping for significant European (and worldwide) economic growth, a decisive defeat of the evil deflationary dragon, and further bullish ascents in stock marketplaces such as the S+P 500. Prior massive money printing, especially but not only by the Federal Reserve, engendered optimism, enhanced near-term economic growth, and helped to propel many equity benchmarks (notably the S+P 500) upward. So given the ECB’s bold policy announcement on 1/22/15, shouldn’t we all be rather positive about global (and Eurozone) economic prospects? No.
Of course the ECB’s decision to begin devouring “euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market” is only one variable. But despite that central bank’s long-hoped for purchasing scheme, adequate Eurozone GDP growth still appears out of reach, and overall international economic prospects look less robust than they seemed only a few months ago. In addition, despite the ECB’s dramatic policy intervention, key government securities yields show little signs of climbing. This holds true not merely for Germany, but also the United States and Japan. Plus the broad real trade-weighted United States dollar remains relatively strong, nearing critical points achieved in mid-2008 during the global financial disaster. After their massive tumble in recent months, commodities in general (use the broad Goldman Sachs Commodity Index as a benchmark) remain well beneath their June 2014 (and previous) heights.
Yet at least shouldn’t the ECB’s big easing at least manage to rally key stock arenas, and especially to push the S+P 500 above its December 2014 summit? Recall what happened to the S+P 500 after the Federal Reserve unveiled its quantitative easing rounds, or what occurred after Japan introduced “Abenomics” and Quantitative and Qualitative Easing!
However, the S+P 500’s inability thus far to creep up to new bull trend highs beyond its 12/29/14 summit at 2094 contrasts with its prior behavior after the Fed’s QE programs. Again, keep in mind recent yield patterns of key government yield signposts such as the US and German 10 year notes, as well as the stronger dollar and weaker commodities. Also, emerging stock marketplaces in general, with various twists and turns, gradually have sagged lower since their spring 2011 high. So although admittedly not much time has passed since the ECB’s December action, these interrelated factors and slipping world growth prospects indicate that the ECB’s new policy probably will not produce the hoped-for rally in the S+P 500 and related stock playgrounds. These present-day marketplace variables, especially when interpreted alongside their history during the mournful 2007-09 global economic crisis, instead suggest that a notable S+P 500 downtrend is or soon will be underway. And in today’s environment, what happens to American stocks if overall US corporate earnings slow or move into reverse?
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Negative Creep- the Global Economy (2-2-15)
United States natural gas inventory days coverage probably will be quite low at the end of the 2013-14 winter draw season. The NYMEX natural gas complex includes not only the nearest futures continuation benchmark, but also actual calendar months and actual seasonal (summer; winter) and calendar year strips. These various marketplaces do not necessarily all travel in the same fashion. Yet assuming normal weather for the balance of this winter, the NYMEX natural gas complex “in general” probably will continue its major bull move.
Given the expected low days coverage in US natural gas inventories by end March 2014, it would be unsurprising if the NYMEX nearest futures continuation contract significantly challenged major resistance around 6.10 (recall the January 2010 pinnacle). However, as winter ends and the nearest futures natural gas contract becomes a springtime one (such as April 2014 or May 2014), sustained moves in the front month contract over 6.10 will be difficult (at least in the near term). The supply/demand situation for the actual March 2014 gas contract (the current nearest futures) is not quite the same as that for the May 2014 one (when inventories are building). If colder than normal weather occurs during the balance of this February and March, a spike above the 610 summit (even if it does not last very long) is probable.
Admittedly, the NYMEX natural gas complex is vulnerable to a rather significant price decline from recent tops. Suppose weather for the balance of this winter season is warmer than normal; that may help to inspire a price drop.
However, even with normal weather, interim price declines may occur. Although the current inventory situation in US natural gas displays rather low days coverage relative to consumption, the shortage will become less severe during calendar 2014 as a whole due to a year-on-year rise in production and fall in demand.
Though the April through October 2014 build season probably will reduce the existing significant days coverage shortfall, it will not eliminate it. Since days coverage for the next several months (through the 2014 build season at least) probably will remain somewhat below normal, this will tend to support prices in the NYMEX natural gas complex in general.
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US Natural Gas- Drawing Conclusions (2-17-14)
Charts- NYMEX natural gas (3 charts, for essay US Natural Gas- Drawing Conclusions) (Feb 17, 2014)
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