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Posts Tagged ‘equities’

1 Jul 21 2010 @ 10:50am by Matt Smith in Crude Oil, Global Energy, Natural Gas, Random, UK natural gas

The Commodity Cast of Toy Story

Trust me on this one, it’s not as far fetched as it first seems. Commodityworld(tm) is a big place, and there have been a number of commodities in the news recently, some familiar to energy, and some not. So let’s take a closer look at some of these headline grabbers, through their natural comparisons to our pixelated friends from Toy Story.    

A Crude Tail

What first sent me on the Toy Story tangent is the way that crude oil has been following equities recently. I know the relationship has been somewhat apparent over the last eighteen months or so, but this relationship has tightened even more in recent weeks. For July, the correlation between the S&P500 and the first-month WTI price has been a remarkably strong +0.93 (correlations can run from + 1.0 to -1.0), which makes me draw the analogy with Slinky the dog. Equities represent the head, and crude is , erm, the rear. Corporate earnings surprises are causing the excitable head of the dog (equities) to lead the charge for risky assets. This leaves crude at the other end of the slinky, being whipsawed around, yet following nonetheless. No tail wagging the dog here, crude is ignoring its own fundamentals for the most part, and being easily led.    

Cocoa and Lumber

Next up is a not an energy commodity, but is one of our favorite commodities….chocolate. Or in trader-talk, cocoa. Cocoa is currently making headlines, due to some blatant market manipulation by a British hedge fund led by Anthony Ward. Last week he bought 241,000 tons of cocoa beans, which is enough to manufacture 5.3 billion quarter-pound chocolate bars. The transaction was the single largest cocoa trade in 14 years, and unsurprisingly caused prices to rise. Prices have since fallen in the last day, but with the power to potentially force manufacturers to raise the price of chocolate bars, cocoa is like Buzz Lightyear, as we could see prices head to infinity…and beyond.       

UK Nat Gas

There’s not much to say about first-month NBP UK natural gas, except that it continues to make other-worldly moves, rising a stellar 48% on the prompt month for Q2 this year, only to rip 21% lower since early July. Referred to as avant garde jazz on the burrito previously, we update this analogy as UK nat gas gives us as much cohesion sometimes as a three-eyed alien. So while we come in peace, let’s move on swiftly.      

From limber lumber to lumber the tumbler

The next non-energy commodity to be sliced and diced is lumber, hence its blunt analogy to…Woody. Lumber is making headlines for very different reasons to enemy-then-buddy Buzz Lightyear (i.e., cocoa). Lumber steadily increased in value throughout 2009 and into 2010,  as the economic downturn forced the closure of lumber mills and increased lumbers scarcity. Now, just as mills start to come back online, cracks are re-appearing in the economic foundation. This has been highlighted most recently by remarkably poor housing data. Hence, as the chart glaringly illustrates, lumber prices are getting the whoop-bang-wallop treatment.      

Darth Tater

 Last, but by no means least, we come to my favorite character in Toy Story; the one, the only, Mr Potatohead. In Commodityworld(tm), Mr Potatohead represents our dearly beloved US natural gas, as unconventional plays such as shale and LNG are changing the face of the natural gas complex. As technology develops, we will see these changes continue over the next decade or three, to where the market will look unrecognizable to what it once was.      

So, on that note, I bid you farewell, and leave you to dwell on the analogies laid out before you. And as Darth Tater would say, may the force be with you.

0 Jul 1 2010 @ 10:23pm by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas

The Burrito Review of Q2

The end of the Q2 leaves us somewhat this way.

Ironically, the end of the show ‘Lost’ this quarter has left financial markets to take up this mantle instead. Let’s rise above the confusion this week (= diplomatic way of saying ‘the worryingly bad market action’) to put on the wide-angle lens and take a broader look at the bigger picture: the key moments in the second quarter of 2010:  

Round the energycommodityworld(tm) in sixty seconds:  

US natural gas first up; natty started Q2 a nickel higher than the prompt month low of the year at $3.81, and gradually rallied through the quarter on a mild end to spring, a hot start to summer, and an expectedly busy hurricane season. That was, however until last week, when it ran full steam into a key technical resistance level around $5.23 and got knocked onto the canvas, waking up around the $4.62 mark where it finished the quarter. UK natural gas has been one-way traffic, starting the quarter sub-30p, but closing out here nearly 50% higher in the mid-40 pennies, as outage after outage at Norwegian and North Sea facilities have caused gas flows to be volatile, and traders to be skittish. European power markets prompt and calendar strips have taken a nod from natural gas,  while also tracking recovering coal and carbon prices. Finally, black gold, Texas tea started Q2 in the lofty position of the mid-$80s, before having a rollercoaster ride as low as $64.24 on a fourteen-day trouncing which saw it lose over 26% from the high of the year made at $87.15. This fall was due to a tumultuously tumbling euro / strong dollar relationship, as sovereign debt worries across the Eurozone sprung up like sprinklers on a golf course. Prices have recovered somewhat to finish the quarter at $75. Stop the clock. 

Scores on the doors for Q2, 2010:  

US natural gas prompt month: +19.3%
US natural gas Calendar 2011 strip: +0.01%
NBP UK natural gas prompt month: +48.1%
NBP UK natural gas Calendar 2011 strip: +40.9%
German power prompt month: +34.2%
German power Calendar 2011 strip: +16.7%
WTI crude oil prompt month: -11.9%
WTI crude oil Calendar 2011 strip: -13.3%
S&P500: -11.9%  

Biggest energy-related event of the quarter: The BP oil spill in the Gulf of Mexico. You probably heard about it.   

Macro-economic event of the quarter: It’s difficult to pick one from many good ‘uns, but the jobless recovery in Q2 has been as good as anything to provide smoke and mirrors for clarity on an economic recovery in the US. The smoke has mostly been blown and the mirrors held by census workers, who have temporarily boosted / distorted unemployment data, although like all good discolorations, this will all come out in the wash.   

Biggest financial non-event of the quarter: The revaluation of the Chinese Yuan. Just like getting excited about Christmas or a vacation, the arrival of this event didn’t quite live up to the hype. Despite the initial excitement it caused, the revaluation was a political manouver by the Chinese to avoid it being a key discussion point at the G20 meeting in Toronto last week. In that respect, mission accomplished. In terms of having maximum impact, minimal movement, mission accomplished too. All in all, a bold hand, cheekily played by the Chinese.  

Chart of the Quarter: The below chart tells a number of stories; that crude and equities continue to be best friends; that their fortunes have continued to improve over the past eighteen months, and that if you are culpable for the biggest oil spill in US history, your stock price will get absolutely spanked:  


 Largest loss of the quarter: Apart from BP’s stock price, one of the obvious candidates is eighties pint-sized icon, Gary Coleman…RIP  

Stealth datapoint move of the quarter: I have been a bond bull and wrong for a very long time (note: Pinky and the Brain post), so am not surprised to see Treasuries quietly rally throughout Q2 to pierce the 3% level. The downside to this move is what it indicates: that investors are worried about either deflation or a double dip recession. Unfortunately, the financial crisis and subsequent bailouts come with a steep price to pay; as we say in England, you pays your money and you takes your choices.  

Q3….bring it on.

0 Jun 23 2010 @ 10:57am by Matt Smith in Crude Oil, Global Energy, risk management

The euro’s the one, and not the yuan.

The euro and the yuan = the Sonny and Cher of the currency markets

After the fireworks and celebrations in the streets that followed the announcement that the yuan is set to be unpegged from the US dollar to float freely, the initial excitement, like the bubbly, has now lost its fizz. What initially appeared as a selfless act of cooperation and compromise by China, has morphed into the realization that this announcement was just a mere gesture by them to avoid getting flame-grilled at this week’s G20 meeting about their position as ‘currency manipulator in chief’. While this move into the limelight firmly positions the yuan as the sexy currency du jour (à la Cher), one of its currency counterparts – the euro – is considered much less attractive (sorry, Sonny). But nonetheless, I’m backing Mr Bono (= the euro) to have a bigger influence over financial markets in the coming months, and specifically, over commodityworld(tm).

Let’s take a step back. So, what’s the big deal about letting the yuan float? It is this: China has pegged their currency to the US dollar for the past few years, which has meant their exporters (a huge driver of their economy) have been charging the world artificially deflated prices for their goods. Good if you are a Chinese exporter and good if you are a purchaser of Chinese goods; bad if you are a producer of competing goods. Unfortunately, most of the world, and especially the US and Europe, are net purchasers of Chinese goods, meaning the undervalued yuan has allowed Chinese producers to undercut domestic producers of similar goods.

Yuan renminbi vs US dollar, March 2009 - present

Letting the yuan float means it will likely strengthen versus other currencies (since it was considered artificially pegged at a low level).  

A strengthening yuan would be good for the global economy because it would make Chinese goods more expensive, hence increasing the competitiveness of other countries, and promoting the rebalancing of those economies with striking trade imbalances (notably, the US) . It should also calm inflationary fears and ease concerns of a housing bubble in China, as a strengthening yuan would be the equivalent of a bucket of cold water on the economy. However, it is more likely that China would let their currency float because they believe their economy is strong enough to be supported by domestic demand, or because of the benefits that an improved purchasing power (from a strengthening currency) gives them in buying goods internationally. Or, alternatively, they think their currency will weaken (it would be hilariously ironic if it did, but isn’t beyond the realms…).

Then what’s the big deal about the euro?
The euro is the official currency of 16 Eurozone countries. What started out as an attempt to build a superpower strong enough to rival the economic power of the US back in 1999 has ended up turning ever more sour in recent months. The weakest links in the Eurozone chain (= PIIGS) are dragging down the strongest countries in the Eurozone, as waning confidence in the collective currency is causing its devaluation. The chart below is a great illustration of the decoupling seen in the euro at the beginning of the year. While the euro tracked risk appetite during 2009, following a similar path to equities and crude oil (as an inverted flight from safety caused the dollar to weaken and funds to flow into the euro and other risk assets), the considerable sovereign default risks that countries like Greece and Spain are facing have caused a massive move out of the euro, and hence its rate versus the dollar to fall. Drawing this back to commodityworld(tm), and specifically crude, the two have become reacquainted in the past two months, and as the euro has had a relief rally in recent weeks, so have risk assets. Going forward over the next few months, the Eurozone is likely to face further and increasing default risks, which can only have a detrimental effect on the euro, and risk generally. This puts headwinds against crude oil advancing at a strong pace, regardless of the decoupling seen earlier in the year:  

Maybe I am being too cynical here; perhaps this move by China’s policymakers is a clear signal that they are willing to cooperate with the global financial community. Yet for all of the furor that the announcement has made, there has been little evidence that it will have a dramatic impact on markets (and hence commodities), in the short term at least. In the meantime, the bigger influence on commodities, and specifically crude oil, is more likely to come from the euro, which should come under further selling pressure as it struggles to find the cure for the economic illnesses infecting a number of its member-nations. As for how this will play out over the long term? We don’t know. And we won’t find out until we grow.

0 Jun 21 2010 @ 10:43am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas

Burrito Bites

Happy Monday, and welcome to what is apparently the happiest day of the year!

Turns out there was lots of good stuff as I caught up on research this weekend, so here’s some of it. A great week unfurls out in front of us, kicked off by China’s announcement over the weekend to float the Yuan. This week sees a whole host of economic data (with a heavy tilt toward housing), while in Energyburritoville(tm), a keen eye is being kept on our dearly beloved commodities, as both crude and natty are set to fight out jedi-like battles to stay above key support. Burrito bites will follow on Friday, as well as a midweek post, and another guest post with the Houston Chronicle inbetwixt. Until then, care for a nibble?:  

–I say tomato, you say tomato; I say BP, you say British Petroleum.

–And following that point, how British is BP anyway?

–2010 is the hottest year on record thus far say NOAA.

Chinese rainbow fields.

Crouching oil, hidden coal.

The Carbon Footprint of The World Cup.

–Shale gas keeps getting sexier (their words, not mine).

–Go, pub power!

–Lowering the speed limit to 50 mph could reduce CO2 by 30%.

–Liars betray their actions through drawings.

–China shopping spree makes up a good portion of global M&A.

–The ECRI leading index – one we have visited before – could be signalling double dip territory.

Anyone seen E.T.?

there he is!

Top 50 performers in the S&P.

–Go on, my son….Algae biodiesel pricing in at $60 – $80

–Man escapes hell’s angels with puppy, escapes on a stolen bull-dozer.

This (i.e. last) week’s Burrito Deluxe Award of the week goes to any prospect or client who attended the event which launched our UK office – bravo and good on you!

The Burnt Burrito Award of the week is wrestled out of the hands of BP and thrust into the hands of the US economy. ‘The US economy has probably begun a lasting recovery, but the outlook has become more uncertain in recent weeks’ said Lawrence Summers, President Obama’s top economic adviser. Eeek.

Have a good week – may your days feel short and your lunch hours long!

1 May 28 2010 @ 9:08am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, Random, Technology

Burrito bites

Another weird and wonderful week in markets….the DOW dropped below 10k again, only to bounce back above after China refuted that they were pulling out of investing in Europe (I’m still scratching my head as to why markets would rally like a bat out of hell on the denial of Chinese whispers – a denial of something negative is not a positive, but hey). Natty is limbering up, arching its back and stretching its legs as cooling demand and hurricane season are set to kick in, while data indicate further thawing for industrial demand. Meanwhile, crude has been teed up this week, as the fourball of equities, currencies, economic and oil-specific data have been hitting prices around, ultimately driving them higher. Feeling hungry? Feast your eyes on these:

–NOAA is predicting one of the worst hurricane seasons on record.

–A great infographic on the Gulf oil spill…..and another graphic on the plan to fix it.

–From one disaster to another; there’s a certain volcano in Iceland that is likely to erupt.

–Children more likely to own a cell phone than a book.

–Qatari LNG going to China…or is it? 

The winner of 'The Weirdest-Shaped Hot Air Balloon' World Championship

Is hydropower really a clean power source?

–Thinking about refinancing? 30-yr rates near all-time lows.

A photographic tour of a natural gas well at the Marcellus Shale.

–Elephant drinks hot tub dry.

–China – its overheating property market, and the likelihood of it double dipping.

–Economist Paul Krugman weighs in on the inflation debate, saying: when there is a flood you scream fire!

–A backlash against the backlash on Shale gas.

–The ipod revolution: a graphical representation of the history of the ipod.

16 things you can buy at a Chinese Walmart.

The Burnt Burrito Award of the week goes to BP; the oil spill is now the largest in US history.

The Burrito Deluxe Award of the week goes to long weekends – have a wonderful extended weekend / Memorial Day / Bank Holiday!