Alrightee folks, this week we are going to look at four charts which highlight the good, the bad, and the ugly currently surrounding our dearly beloved commodities, and general markets. And one chart which highlights the oddness.       

So let’s dive straight in and start with the Good. The good in this instance represents strong production in the US natural gas market. As the chart below illustrates, production has never been this good, for this year or for the past five years. Despite prices being at what is considered a low level, production continues to grow as break-even costs for new unconventional plays (i.e., shale) mean it is cost-effective to drill for gas at sub-$5. This is further reaffirmed by natural gas rig counts currently hitting an eighteen-month high. 

US weekly natural gas production (source: Bentek)

‘You see, in this world there’s two kinds of people, my friend: Those with loaded guns and those who dig. You dig.’   

The Bad is illustrated through current distillate demand in the US. As the arrow clearly indicates, demand has headed south at a rapid clip since the highs made for the year back in June. This wouldn’t be such a worry in itself; after all, distillate demand is seasonal, and it is currently the time of year for demand to be in slumber. However,  the bigger issue is that demand levels are only a meager 3.6% higher than last year’s anemic levels, and well below the 5-yr average. Not the data you would expect from an economy supposedly in the early throes of expansion:     

US distillate products supplied (source: EIA)

‘There are two kinds of people in the world, my friend: Those with a rope around the neck, and the people who have the job of doing the cutting.‘   

The next chart is U-G-L-Y (and no, it doesn’t have an alibi). This chart shows the yield on 10-year US government debt. Prices of bonds move inversely to yield (e.g., as prices rise, yields decline). Government bonds, especially Treasuries issued by the US federal government, are seen as the safest of assets; in times of heightened risk aversion (= ‘flight to safety’) investors move their money into bonds, pushing prices up (and yields lower). The last time the yield was as low as 2.6% was back in March 2009, which coincided with equity markets hitting their lows. Government bonds in the last three months, however, have seen strong buying once more. This signals another flight to safety as investors’ views on the economic outlook have deteriorated (with rising concerns over a ‘double dip’ recession) and worries of a deflationary environment shimmy from being incredulous to in-the-mix:  ‘There are two kinds of spurs, my friend. Those that come in by the door; those that come in by the window.’   

And finally, I found this interesting as it was Odd. Back in June we looked at the revaluation of the Yuan (through Sonny and Cher…c’mon, you remember!). At the time, the de-pegging of the Chinese currency was met with both excitement and the expectation for a strong rally. However, the last two months have yielded a modest move (don’t let the chart deceive you…the move from 6.83 to 6.79 only looks big relative to the lack of movement in the previous year). For now it looks as though the revaluation has allowed the Chinese to both appease foreign nations who were accusing them of currency manipulation, while also not drastically changing the currency landscape for its exporters; a win-win situation. 

It feels fitting to end with some type of poignant quote. But instead I leave you with two straight-shooting quotes from Mr Clint Eastwood himself. The first ties in nicely with risk management, reminding us that life is unpredictable: ‘if you want a guarantee, buy a toaster’. And the second is to keep a positive perspective: ‘I don’t believe in pessimism. If something doesn’t come up the way you want, forge ahead. If you think it is going to rain, it will’. That’s my lot; thanks for playing.