Although I’m working on a few other posts, I’ve been distracted this past week by a number of key documents, speeches, and data releases (and of course, the omnipresent preoccupation of linking cartoons to commodities). Hither and thither, here are some observations I have cobbled together.
Posts Tagged ‘industrial production’
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Sep 21 @ 10:55am by Matt Smith in Crude Oil, Economy, Global Energy, Natural Gas
Natural Gas is Eeyore, and Other Observations
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Jun 23 @ 10:58am by Matt Smith in Capital Markets, Crude Oil, Global Energy, Risk Strategy, risk management
Similar Flavors in Market Ingredients
It’s not that financial markets aren’t always a conundrum (they are), but their current cohesion is a conundrum in itself. Looking across key assets and aspects of the economy - from manufacturing to house prices to employment to our dearly beloved commodities - market ingredients are leaving a similar taste - of waning optimism. So here’s some current market themes, of course wrapped in an energy-flavored tortilla: » read more
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Nov 18 @ 10:44am by Matt Smith in Capital Markets, Economy, Natural Gas, risk management
Harry Potter and the Energy Sector
What with all the Harry Potter excitement going round at the moment, I figured this would be topical this week…..various aspects of the industrial sector are being pushed and pulled by the forces of good and evil; so let’s take a look at three examples of the battles that are raging, through the medium of our Hogwartian hero and his friends / foes. » read more
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Jul 15 @ 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.
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Apr 29 @ 10:20am by Matt Smith in Crude Oil, Economy
Economic recovery does not mean we are at pre-recessionary levels
I agree data are improving. I agree things are looking better. I agree it is good news that we are seeing improvement across the US (ISM manufacturing, Case Shiller Housing Index, Nonfarm Payrolls, insert favorite data point here ____________). However, regardless of how Pollyanna-ish your view may be, you cannot say that the recovery of the last nine months (give or take) has clawed us back to the levels of where we were before ‘the great recession’ - in terms of GDP, in terms of industrial production, or in terms of oil demand. It is just not the case.
Granted, industrial production has shown nine months of improvement, the manufacturing sector has expanded for eight consecutive months, and gross domestic product (aka economic output) was up a solid 5.6% for Q4 2009. Heck, even the Case Shiller Index is showing positive house price growth on a year-over-year basis (for the first time since late ‘06). But these economic indicators are coming from an extremely depressed place, where they were hanging out at a bar, drinking away their sorrows with oil demand. Yet it is easy to see why current data are interpreted as being rosy; to a certain extent they are. When comparing data on a year-over-year basis (=base effect), they are bound to look great as the numbers in the year prior were so awful:
However, if you look at the indices (rather than on a year-over-year basis) for such data as industrial production, you can see that the recovery has not been all that impressive; data have failed to come within a country mile of pre-recessionary levels. If this is the best rebound that the recovering economy can muster, we could be in the opening scenes of our own Greek tragedy: 
In terms of our burrito buddy distillates, its demand runs on a lag to industrial production, so it has only recently bottomed out on a year-over-year basis. Meanwhile, indexed demand (although smoothed), shows that a solid return in demand is yet to kick in at all.
So, herein my problem lies. Yes, recovery is underway, but it is spluttering along, all the while being driven by government spending. It would take a fully-fledged cycle of strong economic growth to get us back to pre-recessionary levels, but instead we are facing a difficult enough battle to establish a jobless recovery (with 8.4 million jobs lost in 2008 and 2009). As the US looks in flux (fluxable?), Europe looks in trouble, so once again we look to the (Far) East and the emerging markets to carry the burden and lift the global economy back to its feet again. Can they do it? There’s always hope.
