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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OIL’S TROUBLED WATERS © Leo Haviland May 18, 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)

STILL HEADING DOWN: EMERGING STOCK MARKETPLACES AND COMMODITIES © Leo Haviland October 7, 2013

From the end of the Goldilocks Era in mid-2007 to the depths of the worldwide economic crisis in late 2008 and early 2009 and onward through the ensuing global recovery up to now, “overall” emerging stock marketplaces and commodities “in general” generally have traveled together. The emerging stock marketplace and commodities domains have been in a sideways to bearish trend since their spring 2011 peaks. In the wake of Federal Reserve Board tapering talk, they established interim lows in late June 2013. Yet despite the notable rally since then, in recent weeks they probably have resumed their interrelated downtrends. These bear moves probably will continue. Within the commodities realm, the tumble of the petroleum complex is especially noteworthy.

The bull and bear adventures and timing relationships between emerging stocks and the broad GSCI are not perfect. However, in recent years they have been rather close. Since the peaks in spring 2011, note the pattern of lower and lower highs as the downtrends have proceeded.

Petroleum constitutes an important part of the broad GSCI and many other commodity indices. The petroleum story and its supply/demand situation are important components for the emerging marketplace growth theme. However, note the late summer 2013 reversal of the petroleum bull move that began around a late June 2013 take-off point. In addition, the overall worldwide petroleum situation is bearish. Weakness in various corners of the oil marketplace in recent weeks suggests that commodities “in general” probably will continue to venture lower over the next few months. So what does the historically close association between trends in emerging stock marketplaces and commodities in general suggest? The renewed bear trend in petroleum since late summer 2013 indicates that the MXEF will continue to drift lower as well.
Read the rest of this entry »

NORTH SEA CRUDE OIL OUTPUT: PERSPECTIVES AND PRICE CONSEQUENCES © Leo Haviland, January 3, 2013

For over a decade, and notably since the mid-2000s, OECD Europe crude oil production has slumped as a percentage of worldwide petroleum output. The majority of that European output issues from the North Sea. More importantly, yearly average European crude oil production has

plummeted over that span. North Sea production includes a key international crude oil price benchmark, Brent and related other offshore crude streams.

North Sea/Brent does not merely capture trader attention and spark media headlines. Despite its diminishing physical supply role as a share of global production, despite its sharp absolute production drop, North Sea/Brent’s marketplace power nevertheless is very important and extends around the globe. Why? The petroleum industry continues to price many other crude oils directly or indirectly relative to it. North Sea/Brent has a greatly disproportionate influence on global crude oil pricing relative to its output.

Moreover, not only has the barrel per day output of North Sea/Brent declined in recent years. Demand for the “high quality sweet” grades it represents remains substantial.

Consequently, all else equal, North Sea/Brent (“Brent”) crude oil supply in recent years generally has become tight (low “free supply”). So all else equal, since Brent acts as a price guide for other crudes, its supply/demand situation thereby tends to boost global crude oil prices to and sustain them at “high” (or “relatively high”) levels.

Brent’s bottom at the depth of the worldwide economic crisis was $36.20 per barrel (12/24/08). Although it peaked 3/1/12 at 12840 (making a double top alongside the 4/11/11 and 4/28/11 plateaus around 12700), at over 11000 it still remains quite high.

In 2000, European crude oil production was about 6.8mmbd, nearly equal to 1996’s 6.7mmbd. By 2004, it eroded to 6.1mmbd. European oil output represented 9.2 percent of world supply in calendar 1996, 8.8pc in 2000, and 7.3pc in 2004.

Since 2004, European output continued its steady and sharp descent, as did its share of total world oil production. In 2005 it was 5.7mmbd (6.7pc of global supply), with 2006 at 5.3mm (6.2pc), 2007 five mmbd (5.8pc), and 2008 4.8mmbd (5.5pc).

In 2009, it was 4.5mmbd (5.3 percent). In 2010, it was only 4.1mmbd (4.7pc), with 2011’s down even further to 3.8mmbd (4.3 percent of 88.4mmbd). The IEA estimates 2012 at 3.4mmbd, down about 50 percent from the 1996/2000 heights and merely 3.7pc of global production about 90.8mmbd (assume 4Q12 supply stood around that of the prior three quarters).

Not only has Brent long been a major international benchmark crude oil. Arguably its guiding influence on petroleum pricing has grown in recent years.

Compare the secular decline in North Sea crude oil output with recent US crude oil production trends. America’s long-run crude oil production tumble ended around 2008. Read the rest of this entry »