Ok, ok, I’ll put the Star Wars theme to bed. For today, my friends, we are going to look at some facts and figures about storage across a number of our dearly beloved commodities and a number of geographies – highlighting (for the most part) a theme of staunch stockpiles.  

To further provide some educational information, in addition to the focus on energy, there is also some trivia relating to the ultimate sultan of storage…the squirrel. So enjoy!

–UK natural gas storage is still approximately three quarters full at 74%,  nearly double the level it was this time last year. In contrast to the UK in 2010 experiencing the coldest December on record, the entire year of 2011 turned out to be the second warmest on record, with a mild start to winter setting up a weak demand environment (and strong storage) for UK natty in 2012.     

UK natural gas storage level

–Apparently a squirrel eats up to 9,000 nuts in its lifetime, but likely stores double that (but is too absent-minded to remember where).  

–Crude oil stockpiles in the US sit at a healthy 338 million barrels. In addition to this, there is nearly 700 million barrels stored in the Strategic Petroleum Reserve.  

US crude stocks (ex SPR)

–Swot up on those squirrel smarts with this squirrel quiz!  

–US natural gas storage is at a 586 Bcf surplus to last year (= 25%), while the surplus to the five-year average sits at an even more humongous 601 Bcf, as near-record supply and a warm winter head off demand at the pass.  

US natural gas storage level

–A squirrel acorn stash caused a car to breakdown this winter (in a Beverly Hills Cop stuff-something-in-the-tailpipe kind of way).   

–Gasoline inventories in the US are at the same elevated level as last year, as demand remains exceptionally weak. High retail prices, persistently high unemployment, and gaining efficiencies from the auto sector has seen gasoline demand reach a ten-year low, currently 7.3% lower than the four-week average of last year.   

Gasoline inventories

–Squirrels produce two litters a year, whose timing coincides with the two sets of shoulder months for natural gas of spring and early fall.   

–Despite strong stockpiles in the US, the OECD in general has seen depleting stock levels in the last year, predominantly due to the loss of supply from Libya (OECD = Organization for Economic Cooperation and Development = 34 member countries including most of Europe, the US, Canada and Japan).

–A squirrel stores so much because it eats its own body weight in nuts and seeds in a week.

Storage levels and squirrels. In one word…nuts.

2011 has been an amazing year in EnergyBurritoland™. Thank you so much for reading, and I hope you have the most utterly brilliant holiday period. What a year it has been; here’s a quick tour of some of the key themes and drivers of Energyland™ in the past twelve months:

Happy Holidays!

The two prices have converged to parity recently, but not for the reasons we may have previously considered. It seemed more likely that the two would meet due to wintry weather boosting natty, and increasing demand boosting gasoline, but neither of these scenarios have played out. So let’s take a look at some of the real reasons for the emergence of this convergence.

1) Natural Gas: Total supply is as strong as an ox  (now around its highest level for the year)

2) Gasoline: Demand is as meek as a lamb (down 4.5% versus same 4-week period of last year)

3) Natural Gas: Storage polevaulted itself (à la Sergey Bubka) to a new record level of 3,852 Bcf last month

4) Gasoline: The national average retail price has slid 18% from the high of $3.985 in early May

5) Natural Gas: After the deficit to last year’s storage level reached 275 Bcf in June, we have now flipped to a storage surplus of 154 Bcf

6) Gasoline: Inventories in the US have just reached a five-year high for this time of year at nearly 219 million barrels

7) Natural Gas: Prompt month prices have not been below $4 in December since 2002

8) Gasoline: Distillates are seeing year-on-year demand growth, leading to increased refining, which is ramping up gasoline production as a bi-product 

9) Natural Gas: A warmer-than-normal start to winter (hark, see left) is limiting heating demand in key regions

10) Gasoline: The disparity between distillate (=diesel) and gasoline demand is typified through their pricing. Current retail gasoline prices are up 9% versus last year, while retail diesel prices are up….20%

There you have it. There are a number of different cases of emerging convergence in commodityland™ currently, from European coal and Brent crude prices, to the narrowing spread between Brent and WTI. However, none is as oddly intriguing as the marriage of natural gas and retail gasoline prices, and the prospect of whether this trend will hold.

Oh my gosh, I hope this picture brings you as much amusement as it does me. With the return of piracy into the mainstream media in the last week, I have been reminiscing about the most fantastic of movies - The Goonies – and how it is inevitably tied back to energy. So here’s some truffle-shuffle-tastic insights to take us from crude to natty to Mikey to Mouth to Data to Brand to Andy to Stef, and to of course…Chunk (Captain Chunk!).

Piracy is back on the radar this week after a Somali pirate leader was sentenced to life in prison by a US judge for hijacking a yacht and subsequently murdering four Americans.

Here are some One-eyed Willie-esque pertinent points about piracy:

–Piracy costs the world shipping industry $9 billion a year
–The largest single volume of crude captured was 2 million barrels  in February of this year, when a VLCC (Very Large Crude Carrier) was captured on the world’s most important oil maritime route – the Indian Ocean
–Over 40 percent of the world’s seaborne oil passes through the Gulf of Aden and the Arabian Sea, which is the northern part of the Indian Ocean
–the average ransom payment last year was $5.4 million, with the largest being $9.5 million
–Ransoms have jumped 36-fold in the past five years, with attacks off Somalia the highest on record last year, with 49 vessels and 1,016 crew members hijacked

Data, you Goonie!

Next up, some interesting information / data flows relating to energyworld™ this week:

–1.9 billion gallons of fuel were wasted in the US last year due to people being stuck in traffic
–The EPA announced it is to ease the Cross State Air Pollution rule for some power plants to give them more time to comply.
–Crude oil stock levels at Cushing, OK, (where WTI is priced) are now at an 18-month low, down over 28% from the peak earlier this year. Nevertheless, the spread to Brent pricing remains elevated at $23  
–WTI crude oil, US natural gas, EU carbon permits, UN carbon permits, European coal, and US equity indices have all made a low for the year in the last week   

Mouth; you Goonie too!

Next, some of the worst-kept secrets which are being passed around by word of mouth:

–A US double-dip recession is unlikely,  imminent, or we are already there - depending who you listen to, while a European recession has a 40% probability
–Meanwhile, a Greek default appears to be just a matter of time 

And finally, some random facts about The Goonies:

–The old Clatsop County Jail, scene of the Fratelli jail break, is now home to the Oregon Film Museum
–The pirate ship was entirely real. After the film, it was offered to anyone who would take it, but sadly, no one wanted it, so the ship was chopped into scraps
–The cast was not allowed to see the pirate ship before the scene was shot. When they did see it, some of the kids said “holy ****!” so the scene had to be re-shot without them cursing
–The Goonies grossed US$9 million in its opening weekend in the US, second behind Rambo: First Blood Part II
–It cost $10mln to make and earned over US$61 mln in 1985

Thanks once again for playing. Stay true to the cause, and remember: Goonies never say die.

In times of market turbulence like this, I find it useful to do two things: make simple observations, and seek solace in the wisdom of others. So this week I have turned to the most voracious voice of reason, Winston Churchill, to help me make some sense of this all. This is what he has told me:

‘I never worry about action, but only inaction’

This simple expression from Churchill underlines the conundrum that the US currently faces. It is loose monetary policy (= low interest rates) which has spurred on the rally in equities and commodities in the past two years. Interest rates reached an historic low of 0.25% in December 2008, as the US central bank (= the Federal Reserve = ‘the Fed’)  took extreme steps to boost an economy in the midst of a severe recession.  

The logic was that low interest rates would encourage both individuals and businesses to borrow and spend, leading the economy back into recovery. This was partly effective, as economic data bottomed out and employment, manufacturing, spending, housing, and sentiment all made a tentative comeback.

However, it was not good enough, as the economy started to stall, and the government had to introduce quantitative easing (to the tune of $1.75 trillion in late 2008) and then the sequel, quantitative easing two (QE2 - a further $600 billion in late 2010) to try and revive the economy by essentially pumping liquidity into the system (by printing money, and buying US debt). 

These two endeavors unfortunately did not achieve their goal of spurring on a sustained economic recovery, leaving the Federal Reserve to announce on Tuesday it will be keeping interest rates at a record low until at least mid-2013:   

So while Winston Churchill warns of the perils of inaction, the Fed is left between a rock and a hard place. The rock is interest rates anchored at near-nil. The hard place is considering QE3.

‘If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time – a tremendous whack’

So the alternative of inaction by the Fed is further monetary stimulus, which would likely take the form of a third round of quantitative easing. This is considered an increasingly plausible option, especially if  the economy continues on its path to recessionary conditions, and inflationary pressures wane and give way to deflationary fears (while inflation can be fought by raising interest rates, there is nothing to fight deflation – ask Japan).

So while QE3 may seem ludicrous, the Fed may be given no choice if conditions turn armageddonesque. And after the failure of the prior two rounds to spur a lasting and robust recovery the Fed would likely feel pressure to really raise the stakes this time around, and hit the market a third time…with a tremendous whack.   

‘Kites rise highest against the wind – not with it’

Perhaps the most surreal event of the last week – that of the US having its debt downgraded for the first time in history – has prompted a similarly surreal event in…US debt. A combination of this news with a bout of poor economic data have sent equities and (most) commodities spiraling lower. This in turn has sent a flood of money heading into the safe-haven of US government bonds, regardless of the downgrade. Bond yields across the curve have hit fresh lows, as buying appetite has been insatiable:

This move into bonds tells us a number of things; that there is a rapidly rising expectation for a double-dip recession; that deflationary concerns are rising; and that the downgrade of US debt is of little material concern to risk-fleeing Treasury buyers. So as the headwinds for the US economy suddenly hit gale-force gusts, the kite of US debt flies to its highest point.

‘Everyone has his day and some days last longer than others’

Finally, current events are causing heightened volatility across asset classes, which leads us back to commodities. The point of this post was to talk about the bigger picture, as the implications of how current economic events play out will have a profound effect on commodities, and specifically energy. 

With crude oil taking direction from the equity markets (the litmus test for risk appetite and market sentiment), it is only natural to see prices reacting accordingly with such volatility, and with such a sharp correction. And the volatility at least will likely continue over the coming weeks as uncertainty continues to unfurl.

Meanwhile, other commodities such as US natural gas and coal are showing a muted reaction, somewhat insulated by their own market-specific fundamentals. And then there is Dr. Copper (the metal so good at gauging the economy it is considered to have a Ph.D in economics) and gold (the ultimate safe-haven). Copper is crestfallen, while gold is having its day and hitting all new nominal heights. And just as volatility is set to persist in general markets, gold is likely to see its day is lasting longer than others: