NASA image of Hurricane Earl

Another Nonfarm Friday appears in our rear-view, as we speed towards fall. Markets have had a surprisingly good week, as economic data has predominantly come in better than expected, shaking up the economic picture that little bit more. Crude is back around the mid-$70s, while natural gas is edging towards $4 once again as we approach the peak of hurricane season next Friday. A long weekend deserves a long applause; please dine on these delacacies before checking out:

–Another oil rig explodes in the Gulf of Mexico, but apparently there’s no sheen, the fire’s out, and the workers are safe. 

–Fracking yields fuel and fear in the Northeast. 

–Men waste GBP2,000 in fuel while lost because they won’t ask for directions

–Dispersants may delay the recovery of the Gulf by decades.

–The world’s largest solar plant.

Janmashtami festival, India

–Are TV ads more effective if we pay less attention?

It’s not that I’m a huge Beatles fan, but I read last week that Rolling Stone magazine were releasing their list of top 100 Beatles songs, and I thought, ‘ooh, I bet they have some songs that relate to commodity markets’. And sure enough…they do. So here they are – some links are obvious, and some are tenuous. But all of them rock:

Magical Mystery Tour - A number of energy commodities take a magical mystery tour before arriving at their point of consumption. For example, LNG imports into the UK predominantly come from Qatar and Trinidad, while the US also imports LNG from these places, as well as from Nigeria and Yemen. The US has net imports of approximately 10 million barrels of oil a day (in crude and products, from countries such as Canada, etc – referenced in last week’s post), while also exporting approximately 2 million barrels a day to places such as Latin America and, err, Gibraltar…a magical mystery tour indeed.

When I’m Sixty-Four - this one could be deemed as a reference for crude oil, which was happy-go-lucky at nigh on $83 in early August, only to precipitously tumble in recent weeks on economic worries and sky-high US stockpiles of crude and products. So, it is not beyond the realms that we could be talking about Texas tea in the near future….when it’s sixty-four (bucks). 

Come Together – A kinship has emerged between risk assets, as equities and commodities have moved in-step since bottoming out early last year. Their close comradeship makes sense to a certain extent, with crude tracking equities for a sign of economic recovery (and hence returning oil demand). But should this tight relationship continue for the foreseeable? It would seem unlikely as fundamentals for crude should climb into the driver’s seat eventually and stop riding shotgun, but for now, they come together.   

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Back in the USSR – While resource-rich Russia has recently had its problems, both their economy and production levels across commodities are now looking brighter. Russia is producing a similar level of natural gas as the US, at 24 Tcf a year, while oil production has now reached a new post-Soviet high of approximately 10 million barrels per day. This is forecast to rise to 10.5 million barrels per day in 2011, maintaining Russia’s status as the second largest oil producer in the world.

Hello Goodbye - Just as crude has struck up a friendship with best buddy equities, it has nurtured an arch-nemesis in the US dollar. Although this relationship shifts from tight to tenuous at moments, the chart illustrates there is definitely still an inverse relationship at play. When risk appetite increases, there is a move out of the dollar and US-denominated Treasuries, and into riskier assets such as equities and commodities. Conversely, when there is a flight to safety, funds flee crude and into the arms of the greenback. Again, will this relationship breakdown at some point as dynamics change? Yes. But for now, as the dollar says goodbye, crude says hello.

Revolution - 2010 seems to be the year that shale has finally been embraced as a revolution for the US natural gas market, after the uprising had been quietly building for so many years. As prompt prices have edged lower through the year, production has continued to increase, signaling that the unconventional shale gas plays have a low-breakeven rate (low enough for production to hit a record high for the year, as prompt month prices hit their lows). Shale now makes up approximately 14% of US production, with the EIA predicting this number to rise to 24% by 2035.    

Ob-la-di  Ob-la-da – la-la-la-la life goes on. Doesn’t it just?

Please feel free to contribute any good ‘uns that you think I’ve missed…..

Here’s the deal; weakening economic data has been unrelentingly pitched at us this week. Few have hit the mark, while many have dealt body blows. And some have just been a slap to the face. So let’s leave these misses, and hit some snacks:  

–How much oil from the spill is still in the Gulf?

–Natural gas futures premium is at its lowest in seven years. 

–Nasty people have a higher risk of heart attacks and strokes.

–Do cities attract hurricanes?

–Renewables increased 8.3% last year in Europe, coal consumption down 16.3%.

–Flow diagram of US energy use.

–Top ten most tattooed cities in the US.

–Factbox about biofuels in Brazil.

–30 new coal-fired plants have been built in the US since 2008.

–Grannies knit smart car cosy.

–New microbe discovered eating oil spill in Gulf (h/t LB/NG).

–11 Green inventions that go too far.

–Fat-fingered Sumo Wrestlers unable to use cell phones.  

–Europe’s brisk energy transition.

–Great piece from the Economist on the outlooks for China and India.

–Chinese traffic jam has lasted nearly 2 weeks, spans 100km – and spurs price gouging.

The Burrito Deluxe Award of the week goes to the heating oil crack spread. This has rallied to a two-month high at $11.50, as higher future prices and Latin American demand has encouraged US refiners to increase output. (The crack spread = the profitability of turning a barrel of oil into heating oil. Calculation = the price of 42 gallons of heating oil minus the price of one barrel of oil).

The Burnt Burrito Award of the week goes to US natural gas, which has made a prompt month low for the year.

Burrito Headline of the Week: Police catch man in bush with socks on his hands.

I hate to go all naysayer-doomsayer-debbie downer on you, but this cannot be good. The Burrito Worry of the Week goes to the housing market. There is now 12.5 months of supply on the market. Even if  you think the economy is not double-dipping, you have to be delusional to think that the housing market isn’t. There were 11 million properties in negative equity in Q2 this year, not one house sold for above $750k across the entire US last month, and existing home sales hit their lowest level since 1996. All rather foreboding for the economic picture.

And finally! Last week’s caption competition was won by Kevin. A giftcard will be winging its way to you – have a burrito on the burrito!  Thanks to all for playing – Ginny, you are nuts.

Have a grandiose weekend!

No need to blame Canada this time, Mr Cartman.

I have a certain affinity with ‘our friends to the North’. Whether it is because I spent eight years working at a Canadian bank, or because one of my favorite people in the world is Canadian (economist Dave Rosenberg, aka Batman – my favorite superhero), or because they produce such great bands as Arcade Fire. I just think they are kinda cool. But to bring this back to our commodity chopping board, here are three random illustrations of their greatness.      

First up, a litmus test to show how they have fared during the ‘great recession’. As we giddily totter ever closer to the edge of double-dipdom, the Canadian employment situation underlines how stoic they have been in the face of adversity. Since the beginning of 2008, Canada has added 173,000 jobs. This is relevant because the US has lost in excess of 7.5 million over the same period. Obviously, the economies of scale are different, but to show positive job growth through the worst recession in nearly a century is rather impressive to say the least:  

Next, we board the good ship natty, to take a look at how much Canada exports to its friends to the South. As the chart below illustrates, although levels have currently dipped below the five-year range, Canada is still the most significant supplier of natural gas to the US (at approximately 11% of total supply). Canada sends half of its total natural gas production in the direction of the US, and this volume blows total global LNG imports out of the water; they are six times as small, and only expected to add 0.5 Tcf to US supply this year:         

Canadian Imports of Natural Gas (source: Bentek)

And finally, we tip our hats to the consistently largest exporter of crude oil to the US: Saudi Arabia Canada. They also have the second largest oil reserves in the world (178 billion barrels, second only to Saudi Arabia), and ultimately supply one in every six barrels consumed in the US:     

Exporters of Crude Oil to the US - May 2010 (000's barrels) - (source:EIA)

So these three quick examples serve to show the impressiveness, the importance, and the relevance of our Canadian counterparts. And we didn’t even need to mention Keanu Reeves, Jim Carrey, or Pamela Anderson. And it is for the above reasons we should be grateful that our friends to the North are both our friends, and to the North. And for that, I raise my glass of Moose Milk to you….cheers.

Happy Friday one and all! Let’s start this week’s summary with some fun (goodness knows we need a laugh after this week’s market action). This picture needs a caption; funniest one wins a burrito-related gift. 

As for markets this week, a flight to safety has been the destination of choice for investors, as economic data continues to point an accusatory finger towards a slowing US economy. Crude is hitting 6-week lows, while natural gas is testing levels not seen in the last three months. That’s enough gloom for now; come on, let’s chow!:

–Is a library really more dangerous than a drilling rig?

–Whiskey biofuel available in a few years, more potent than ethanol.

–Dogs improve office productivity.

–Senior NOAA Scientist admits he lied that the Gulf oil spill is gone. 

–Buffett vs Gross, inflation vs deflation.

–Pay-as-you-throw…reducing landfills by charging by the trashbag.

–9 challenges of alternative energy.

–18-mth low in floating storage points to potential inventory drawdowns for crude.

–Koala negotiates 50mph crash without a scratch. 

–Do 3 shale companies for sale signal the peak in its popularity? 

–Markets in everything – using parking lot satellite surveillance to forecast retail sales.

–Only 8% of energy stimulus spent.

–The Beloit College Mindeset List for the Class of 2014.

–Why Opec doesn’t mind low oil prices.

–Boy, 13, hit by lightning on Friday 13th, at 13.13.

The Burrito Deluxe Award of the week goes to BHP Billiton, for shaking up the M&A landscape (and general markets too) by bidding for Potash - the world’s largest fertilizer producer. There’s a few more twists and turns left in this tale, which should provide some entertainment over the coming weeks.

The Burnt Burrito Award is postponed this week as there were too many losers to choose from.

Have a fantabulous weekend!