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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A BEAR TREND’S END: US NATURAL GAS © Leo Haviland September 4, 2019

Alvin Toffler’s “Future Shock” (Chapter I) notes: “Future shock…the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time.”

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CONCLUSION

The ferocious bear trend in NYMEX natural gas (nearest futures continuation) that commenced after 11/14/18’s 4.929 peak probably ended with 8/5/19’s 2.029 low. If not, it likely will finish fairly soon. Assuming normal weather, major support around 1.90/2.00 probably will hold. For the near term, noteworthy resistance stands around 2.50/2.55, with 3.05/3.10 an important target. If United States winter weather is significantly colder than normal, an advance toward 4.00 looms.

Marketplace history of course is not marketplace destiny. Based on historical major bear trends for NYMEX natural gas (nearest futures), the current bear trend has lasted sufficiently long in price (distance) and time terms for that trend to end and for a bull move to emerge. A critical variable supporting this viewpoint is the overall United States natural gas inventory situation. From the days coverage perspective, America’s natural gas inventory outlook is bullish.

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A Bear Trend's End- US Natural Gas (9-4-19)

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)

PARALLELS IN US NATURAL GAS: 2012 AND 2016 BUILD SEASONS © Leo Haviland, July 4, 2016

OVERVIEW AND CONCLUSION

Cultural viewpoints (including variables selected, organized, and assessed) regarding the past and present or focused on an anticipated future reflect opinions, not science. Moreover, marketplaces “themselves” are not unchanging or Natural phenomena. In any case, marketplace history does not necessarily repeat itself, whether entirely, partly, or at all.

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The United States natural gas build season spans roughly from the end of calendar March to the end of calendar October. America’s natural gas 2016 inventory build season, including its price trends, although it has several more months to run, nevertheless presents several parallels with 2012’s build season. Assuming inventory forecasts for the balance of the 2016 build season come true, one crucial similarity between 2012 and 2016 will be substantially diminishing US natural gas oversupply over the course of build season.

The winters of 2011-12 and 2015-16 not only ended with massive supplies, but also completed long-running major bear trends. In commodity arenas, all else equal, and absent some revolutionary developments on the supply or demand side, there is some tendency for gigantic oversupply (mammoth inventories) accompanied by sustained depressed prices eventually to be reversed by falling production, increasing demand, or both. In natural gas, if prolonged bullish weather patterns appear (such as a torrid summer or frigid winter), they obviously can help to minimize the bearish oversupply situation or transform it to a bullish one.

Also, although natural gas price trends do not always closely intertwine with those of the petroleum marketplace (or commodities “in general”), or with other financial playgrounds such as stocks, currencies (especially the US dollar), and American government and other benchmark interest rates, they can entangle with them. In second half 2012, important stock and commodity marketplaces rallied and the dollar paused in its appreciation. In mid-first quarter 2016, a similar “overall” phenomenon occurred. In both time periods, ongoing or anticipated (eventual) monetary easing by key central banks likely assisted the bull moves in stocks and commodities, including natural gas.

Finally, at times the CFTC’s Commitments of Traders reveals patterns for noncommercial participants (investors, speculators) in natural gas relevant for assessing price trends. The net noncommercial positions in the later stages of the bear trends which ended in 2012 and 2016 present roughly similar patterns.

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From the historical distance (price move) perspective, ten major NYMEX natural gas bear moves prior to 2014-16’s tumble traveled an average of 65.9 percent. For the seven collapses beginning with the December 1996 one, the average downturn is 70.4pc. From the time parameter, the average decline for the 10 big bear moves was about nine and three-quarter months. For the most recent seven major bear moves preceding the one that began in February 2014, the duration averages about eleven and one-quarter.

The collapse from 2/24/14’s 6.493 major high to 3/4/16’s 1.611 low was 75.2 percent and just over 24 months. Thus the price move traveled moderately farther than average. Significantly, the two year decline since February 2014’s summit was more than twice as long as average major bear trends, surpassed only by the January 2010 to April 2012 crash (during which the price fell 68.9pc). Thus from the interrelated price and time variables (nearest futures continuation basis), and though history is not destiny, a major change from the long-running bear trend that commenced in February 2014 probably occurred following 3/4/16’s low.

Also note that March 2016’s 1.611 level stands within a range of other important support. Recall not only 4/19/12’s major low at 1.902, but also the double bottom of 1.85 (1/28/02)/1.76 (9/26/01), a trough at 1.735 on 9/5/96 alongside a low at 2/24/97 at 1.68, and 1998-99’s bottom (8/27/98 at 1.61/2/26/99 at 1.625). Also, the March 2016 trough did not break 12/18/15’s interim low at 1.684 by much.

Moreover, from a calendar day viewpoint, March 4 is within several days of the February dates for the important late February bottoms of 1997 (2/24/97 at 1.68) and 1999 (2/26/99 at 1.625). In addition, the March 2016 low is a two year diagonal time move relative to the late February 2014’s pinnacle.

“US Natural Gas: Traveling Forward” (6/13/16) emphasized: “The United States natural gas (NYMEX nearest futures continuation basis) major bear trend that followed 2/24/14’s major peak at 6.493 ended with 3/4/16’s 1.611 bottom. What if a torrid summer 2016 dramatically reduces the stock build total and thus helps containment fears for end build season 2016 to disappear? Then prices likely will not revisit the 1.60/1.90 range, but instead will maintain their ascent toward [the significant resistance range of] 3.10/3.45… The US natural gas supply/demand perspective over the so-called long run is moderately bullish. Assuming normal winter 2016-17 weather, moderate US economic growth, and no renewed collapse in the overall commodities complex (particularly petroleum), gas prices probably will march higher.”

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Parallels in US Natural Gas- 2012 and 2016 Build Seasons (7-4-16)

US NATURAL GAS: TRAVELING FORWARD © Leo Haviland June 13, 2016

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Bob Dylan’s song “All Along the Watchtower” states:
“’There must be some way out of here,’ said the joker to the thief
“’There’s too much confusion, I can’t get no relief’”.

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CONCLUSION

The United States natural gas (NYMEX nearest futures continuation basis) major bear trend that followed 2/24/14’s major peak at 6.493 ended with 3/4/16’s 1.611 bottom. For the next several months, however, natural gas likely will remain in a sideways pattern. The probable range for the United States natural gas marketplace remains a relatively broad avenue between major support at 1.60/1.90 and significant resistance at 3.10/3.45. This sideways outlook partly results from two currently contending marketplace stories.

For the near term, substantial natural gas oversupply exists, weighing on prices. Containment risks still loom for end of build season 2016. If noteworthy containment problems erupt, March 2016’s bottom may be attacked, even though current prices hover significantly above 1.60/1.90 and even if an assault on that support does not last for much time. What if a torrid summer 2016 dramatically reduces the stock build total and thus helps containment fears for end build season 2016 to disappear? Then prices likely will not revisit the 1.60/1.90 range, but instead will maintain their ascent toward 3.10/3.45.

The US natural gas supply/demand perspective over the so-called long run is moderately bullish. Assuming normal winter 2016-17 weather, moderate US economic growth, and no renewed collapse in the overall commodities complex (particularly petroleum), gas prices probably will march higher.

 

NATURAL GAS: (PARTLY) DANCING IN STEP WITH OTHER MARKETPLACES

Natural gas prices often travel substantially independently of both petroleum (and commodities “in general”) and so-called “international” or “financial” marketplaces and variables. Trend changes in NYMEX natural gas need not roughly coincide with one in the petroleum complex or commodities in general, or currency, stock, or interest rate playgrounds.

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 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 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 peak at 2135. In regard to the timing of the S+P 500’s May 2015 high, the nominal broad trade-weighted dollar (Federal Reserve, H.10, which has daily data) made an interim low at 112.8 on 5/15/15 before appreciating further.

The recent low in NYMEX natural gas nearest futures, 3/4/16’s 1.611, occurred fairly close in time to the first quarter 2016 peak in US dollar and an assortment of notable intertwined 1Q16 lows in other important marketplaces. The trend shifts (price reversals) in first quarter 2016 in various marketplaces assisted the upward move in natural gas that emerged in early March 2016.

**The broad real trade-weighted United States dollar (monthly average) peaked at 101.2 in January 2016; the nominal TWD (which has daily data) established a top 1/20/16 at 126.2 (Federal Reserve, H.10).

**NYMEX crude oil (nearest futures continuation): bottoms $26.19 on 1/20/16 and $26.05 on 2/11/16.

**Broad Goldman Sachs Commodity Index (GSCI): 268 on 1/20/16. January 2016’s GSCI low occurred midway between the calendar month times of its 2008-09 bottom (12/24/08 at 308 and 2/19/09 at 306).

**S+P 500: Note the sharp rally from lows of 1812 on 1/20/16 and 1810 on 2/11/16.

**MXEF (MSCI emerging stock markets index; Morgan Stanley): 687 on 1/21/16, 708 on 2/12/16.

**Ten year US Treasury note: 1.53 percent yield low 2/11/16.

 

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US Natural Gas- Traveling Forward (6-13-16)