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Posts Tagged ‘global recovery’

1 Jul 15 2010 @ 10:55am by Matt Smith in Capital Markets, Economy, Global Energy, Natural Gas, risk management

A Smörgåsbord of Startling Charts

I can’t recall a time when consensus has been so divided as to whether prices are set to rally or crash, be it in commodities, equities, bonds, or currencies. So to add to the confusion, here’s some startling charts I’ve been looking at in the last week that highlight some of the changing dynamics and/or current dichotomy in markets:

The first chart up is actually two charts, and they are taken from last week’s IMF World Economic Outlook. The key takeaway from the retail sales chart (left) is the incredible strength exhibited by emerging economies over the past few years, despite the global slowdown and the temporary move into negative territory by advanced economies. As for industrial production (right), the dip has been pronounced for both emerging and advanced economies. However, although strength in emerging economies has dragged the overall world data back into positive territory, advanced economies are still showing contraction from where we were at the beginning of 2007 (as previously discussed here):  

The following index is getting a lot of attention, and is being watched ever more closely as it experiences its 34th consecutive down day. Yep, that’s right. This chart is the Baltic Dry Index, which measures the cost of shipping dry bulk commodities. It acts as an acid test for emerging market demand for raw materials such as coal, iron ore and steel; it basically gives guidance for the economic health of emerging markets, and to a certain extent, future pricing for coal and other commodities. It is still to be seen whether this fall is due to a collapse in demand (and, hence, shipping prices), or whether the supply of ships has increased, raising competition and reducing costs. Whatever the case, the move lower is certainly raising worries about the strength of a global recovery: 

Next up is the 800-pound gorilla in the corner of the US natural gas room: shale. According to EIA data, we know that approximately 8 Bcf/day of US production currently comes from shale, which is approximately 14% of total US production. As for how much production is expected in the future, estimates are wide-ranging, and add to the cloak of mystery and intrigue of shale. The EIA predicts this number to be 16.4 Bcf/day by 2035, making up 24% of the natural gas consumed in the US. An interim report released recently by MIT called ‘The Future of Natural Gas’ shows a large disparity from the US government data, looking at 12 Bcf/day in the next year, to about 29 Bcf/day by 2030 (given current drilling rates and mean resource estimates); whatever the number, shale is set to be a significant influence on the future of US natural gas:

Finally, we take a look at US oil inventories. WTI crude oil is currently sitting around the mid-$70s, despite inventories in the US still above both last year’s level and the 5-year average. The overall inventories picture is, however, somewhat emasculated when compared to the inventory levels of Cushing, OK, where WTI is priced. Near-capacity inventories were making headlines a few months ago, but have dropped off the radar despite remaining at elevated levels. The point is this; crude oil prices at Cushing remain relatively unaffected, despite supply bottlenecking to push inventories to near-capacity. The flipside of this means that once this bottleneck eases, and once both US inventories and Cushing-specific inventories fall, crude will have one less downward influence to weigh on prices:   

So that’s what was on the burrito block this week – hope you enjoyed it. Please feel free to highlight any startling charts you may have seen recently. Laters ‘taters.

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.

1 May 27 2010 @ 9:07am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, risk management

Doorbells and Sleigh Bells and Schnitzel with Noodles

Here are a few of my favorite things. I’m going to go a little left field of nerdy on you here, so I apologize in advance. Here are three pictures that paint three thousand words, which help me keep a grasp on what is going on. Actually, they are just three cool things. So here we go, first up, everything:

I know I always bang the drum about this, but it is essential to keep a handle on what is going on across asset classes, as they can help you to understand short-term movements in your own asset, whatever that may be. Above (courtesy of Econompic) is the performance of a smorgasbord of assets for the month to date (through the medium of ETFs). This illustrates how the best performing asset has been Treasuries (= US government debt = flight to safety), while the worst performer has been our poor old buddy, Texas tea. 

Next up is one of my favorite indicators. And I don’t love this indicator for its accuracy (it has an awful track record of revisions), I just love the pure havoc that it wreaks on the first Friday of every month.  So without further introduction, I present to you Nonfarm Payrolls: 

Don’t get me wrong, US unemployment data is an essential barometer of the economy (…but just viewed over a longer time-frame); it’s the hubris and brouhaha it causes that I love. As for the actual data, the chart above shows how in 2008 and 2009 we saw 8.4 million jobs lost (that’s all the down bars on the right-hand side). Although we are seeing improvement across much of the economic landscape, we need to see sustained and improving job creation (extending from the circled area) to spur on consumer spending to spur on a housing recovery to spur on a sustainable recovery.

Finally, if I was stranded on a desert island and could only access one datapoint which to gauge the US economy by, it would be this (I make that comment knowing full well if I were stranded on a desert island I would be much more interested in hunting for coconuts); the Conference Board Coincident / Lagging Ratio, which measures the strength of the business cycle:

A rising Coincident/Lagging ratio (= indicates improvement as current conditions beat yesterday’s) is an historically proven positive indicator. However, should this indicator wobble and turn lower (…it’s awobbling), that would be bearish indeed.

That’s all folks; thanks for viewing my favorite things – feel free to take them with you as you leave…and remember, they will help if a dog bites or if a bee stings. (err, maybe..).

0 Apr 16 2010 @ 9:55am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas

Burrito bites

So long sad times, so long bad times, burrito bite day is here again!  This week has seen US natty gravitating back to the $4 mark, crude oil oscillating around the $86 mark, and the Dow levitating above 11,000 mark. Lest we forget,  the skies are not clear everywhere, as the image of the week illustrates, as volcanic ash from Iceland spreads its way across Europe, wreaking havoc on air travel.  No more chomping at the bit, let’s chomp on some bites instead:   

Volcanic ash cloud over Iceland

–Crude oil prices could be giving the economy the kiss of death…while worries swirl about Chinese oil demand

–Convicts disguise themselves as sheep. (complete with bad puns). 

–T Boone Pickens pitches lng plan to Congress. 

Wine beats stocks as a long-term liquid investment. 

–It’s not my fault I’m bad at driving – it’s in my genes

A building made of plastic bottles in Taiwan.

–Rosenberg continues to be unrosy, yet my view is tempered as….in Janet I trust – Fed’s Yellen is confident economy ‘is on right track’. 

–Danish hotel offers free meal for pedal-power

–Contrary to the data, China remains the largest holder of US debt, they just buy Treasuries through the UK.

Plastic bottle building unveiled in Taiwan. 

The Burrito Deluxe Award of the week goes to retail sales, which delivered as expected a promising picture of the US consumer getting their groove back on to spend spend spend!

The Burnt Burrito Award of the week goes to volcanoes and their outfall.

May your weekend be filled with songs of cheer!

2 Mar 18 2010 @ 6:33am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas, risk management, Risk Strategy

A recipe for disaster, or ingredients for success?

I really like the quote that says ‘an optimist invented the plane, whereas a pessimist invented the parachute’. I am not declaring myself in either of these camps (I am obviously a well-balanced realist), but believe it would be misguided not to consider the upside and downside risks to current commodity pricing. Admittedly, some of these issues apply more to some commodities than others, but essentially, the sentiment is an ever present theme. So, let’s kick off with looking at some of the ingredients that could derail markets:     

  1. Economic data turning for the worse, led by housing, manufacturing and employment
  2. A deflationary economic environment
  3. A falling equity market
  4. Excess supply
  5. Emerging markets successfully cooling their economies 

ECRI Weekly Leading Index

Let’s tackle each one of these individually (yet briefly too). First up, economic data turning for the worse. The chart (left) illustrates the ECRI weekly leading index, which takes the temperature of the US economy on a regular and timely basis (ie, erm, weekly). This index bottomed out at the start of the recession (which makes sense as it it is a leading index = forward-looking), and has moved higher at a fair clip ever since. That is, until the last 12 weeks, when it has turned decisively lower. This index is an aggregation of a number of data points, hence its weakness raises a rather large red flag. Next up, a deflationary environment. We are already seeing signs of deflation creeping into markets, be it through wages or rent, or through pricing pressure on everyday goods due to new-found frugality in consumers. And a falling equity market would likely occur through the simple equation of the above bullets: 1 + 2 = 3. As for commodity-specific data, serious risks of surplus supply exist across commodity markets; for US natural gas it is from shale plays and increasing rig counts, for crude oil it is from quota non-compliance by Opec, for UK natural gas it is from LNG; and the beat goes on. Then the final bullet: emerging market risk. This one is a toughie. Too much growth could power commodities to such a high price that they crimp potential growth in lagging developed markets. On the other hand, if governments in these emerging markets (especially India and China) go overboard in efforts to quell excessive liquidity and credit in their economies, they risk putting the brakes on growth, which would surely upset global markets. 

That was all a bit hectic. Let’s have a brief interlude of humor before we truck on with the flipside of the coin:

Alrightee. Now to the path that could lead prices higher. In all fairness, it is pretty much the polar opposite of the pessimistic points:      

  1. Improving economic data  – especially industrial production / manufacturing
  2. An inflationary environment
  3. Continuing strength in equities
  4. Continuing demand growth for goods / commodities
  5. Continuing emerging market strength
Bloomberg Financial Conditions Index (Mar 07 – Mar 10)

For the prosecution of falling prices, I would like to present exhibit number one – a chart which illustrates an improving environment in financial markets – aptly named the Bloomberg Index of Financial Conditions. This shows that financial conditions have continued to improve at a trampolining rate since the financial meltdown-panic heydays of late 2008, an indication that the market is continuing to normalize after the shocks of recent years. Essentially, we have clambered over the wall of worry and beyond the territory of financial woes.    

As you well know from my rants, markets are all interlinked, hence bullets 1,3, 4 and 5 go essentially hand-in-hand here. Improving economic data (1) will undoubtedly be driven by higher demand for goods (4), boosting equities (3), while continuing emerging market strength (5) from domestic growth will too spur on global investor sentiment (back to 3, then 4, then 1). It is as inevitable as wrinkles and gray hair that inflation will once again rise up, although when this will arrive it is impossible to say. But one thing is for sure, a commodity rally will be a natural by-product of both an inflationary environment or an improving economic environment. It is on the horizon. 

I don’t know what’s going to happen. I can make a guess, but that is all it would be – a guess. It is much more important to to keep an open mind, but also be aware of all eventualities. So I sign off as I began; with a good quote – ‘the pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails’. I believe we are poised between the devil and the deep blue sea, and all we can do is hang in there, and sail broad reach. Ahoy.