Natural Gas

Possibly a matter of weeks...

Today's June CPI came and unlike virtually every other print in the past 2 months, wasn't an abysmal miss: printing at 0.0% for the headline and 0.2% for the core, it was precisely in line with expectations. As the chart below shows, there has been one month of declining headline CPI in 2012 - and somehow this is supposed to usher in hundreds of billions in QE and/or the Fed volunteering to destroy the short-term funding market using negative IOER rates. Brilliant.

By now, everyone is aware of the incredible increase in the price of corn thanks in large part to the almost unprecedented drought levels across the country. Up another 5% today at over $777, the 30-day run has seen prices up over 41%. However, while this is an unbelievable move to record high prices, on a trailing 12-month basis, this price move has merely mean-reverted to the average gain of the last 10 years. From 2002-2011, the average price rise from July-to-July was around $55 and the current July-to-July price rise is only around $75. While things do not look set to improve any time soon for the weather, some longer-term context for Corn may well be worth considering. Furthermore, as Goldman notes the lack of rainfall and extreme warmth has shifted corn yields to the second-largest yield-loss since 1950 (noting that the current 24% rise in the Ag complex is still well below the 35% rise in the 'drought' summer of 1988) and the implications for global inflation are gravely concerning as hopes of China stimulus are impaired.

Malaysia's state-owned oil and gas company just made a multibillion-dollar bet that Canada will choose to export its shale gas riches. Even though the odds of securing permission to export liquefied natural gas (LNG) from the Canadian west coast are still pretty poor, the costs of such an endeavor immense, and the timeline in question very long, Petronas is putting $5.5 billion on the table – far more than it has ever spent on an acquisition before – to secure a large foothold in the British Columbia shale gas scene.

It's yet another sign that things are getting serious in the global race for resources.

European equities are seen softer at the North American crossover as continued concerns regarding global demand remain stubborn ahead of tonight’s Chinese GDP release. Adding to the risk-aversion is continued caution surrounding the periphery, evident in the Spanish and Italian bourses underperforming today. A key catalyst for trade today has been the ECB’s daily liquidity update, wherein deposits, unsurprisingly, fell dramatically to EUR 324.9bln following the central bank’s cut to zero-deposit rates. The move by the ECB to boost credit flows and lending has slipped at the first hurdle, as the fall in deposits is matched almost exactly by an uptick in the ECB’s current account. As such, it is evident that the banks are still sitting on their cash reserves, reluctant to lend, as the real economy is yet to see a boost from the zero-deposit rate. As expected, the European banks’ share prices are showing the disappointment, with financials one of the worst performing sectors, and CDS’ on bank bonds seen markedly higher. A brief stint of risk appetite was observed following the release of positive money supply figures from China, particularly the new CNY loans number, however the effect was shortlived, as participants continue to eye the upcoming growth release as the next sign of health, or lack thereof, from the world’s second largest economy.

A lack of transparency, a lack of enforcement of law and a compliant media which failed to ask the hard questions and do basic investigative journalism led to the price fixing continuing and the manipulation continuing unchecked on such a wide scale for so long - until it was exposed recently. Similarly, the gold market has the appearance of a market that is a victim of “financial repression”. Given the degree of risk in the world – it is arguable that gold prices should have surged in recent months and should be at much higher levels today. The gold market has all the hallmarks of Libor manipulation but as usual all evidence is ignored until official sources acknowlege the truth. However, like LIBOR the gold manipulation 'conspiracy theory' is likely to soon become conspiracy fact.  It will then – belatedly - become accepted wisdom among 'experts.'  Experts who had never acknowledged it, failed to research and comment on it or had simply dismissed it as a “goldbug accusation.”  Financial repression means that most markets are manipulated today - especially bond and foreign exchange markets.

Japan's core machinery orders were expected to post a modest -2.6% drop. Instead they had a worse collapse than anything seen in the aftermath of the Fukushima disaster, plunging by a stunning 14.8% . And the kick in the groin cherry on top was the current account surplus plunged by 62.6%: consensus forecast: -14.5%. The Japanese economy has once again ground to a halt, only this time it has no earthquake or nuclear explosion to blame. This time it is the entire world's fault, where demand has collapsed proportionately. As a reminder the BOJ expanded its QE yet again on April 27. Must be time for another QE because this time will certainly be different after more than 30 years of failures.  It is time for those brilliant central planners Ph.D's to do engage in more of the same insanity that Einstein warned about decades ago. And incidentally this is not a joke: on Thursday the BOJ is expected to ease yet again. As a reminder, the BOJ already buys ETFs, Corporate Bonds, and REITs. What's left: gold?

Between Clinton's 'prices to be paid' and Obama's new trade-war, is it any wonder the Chinese have decided to escalate their 'more-than-rhetoric' from bartering away from the USD. After ignoring the sanctions and then receiving their exemption, PressTV reports tonight that China is to invest in developing north and south Iranian oil fields (which will produce 700,000 barrels per day of crude). One of the oil fields, Azadegan, has one of the world’s largest oil deposits, with in-place oil reserves estimated at 42 billion barrels - enough to tide China over a for a while - as Iran's Oil Minister Rostam Qasemi adds after 10-15 years of negotiations the decision has finally (and coincidentally very timely) been reached as "the Chinese side has started its activities by investing USD 20 billion in the oil fields".

Several months ago, as John Arnold was terminally unwinding long gas positions into an illiquid market, sending natgas as low as  $1.80, various pundits called for a bidless market in natgas. Today they are silent, because 3 months later, nat gas is 60% higher, and is on the verge of crossing the $3.00 psychological barrier, and going unchanged on the year, in the process pushing Chesapeake energy above $20 for the first time since the vendetta-like Reuters battery of negative articles allowed such activists as Carl Icahn and Dan Loeb, not to mention Zero Hedge readers, to accumulate a position in the name in the mid-teens.

The FDIC decided to wait with its dose of pre-holiday humor until after the Barclays fixing for today's market close turned out to be spot on. And by that we mean that official release of the US banks' "living will" statements, which as far as we know is about the most worthless exercise ever conducted, and about the dumbest thing to be conceived by that very undynamic duo of Barney Frank and Chris Dodd. Because last we checked, the treatment of living wills in bankruptcy court, where all these firms will end up eventually anyway, is... non-existent. But the real fun is when one actually reads this indicative statement from Citigroup: "Citi is today a fundamentally different institution than it was before the crisis." And that's where we stopped. Because it is banks wasting their time (and taxpayer bailout money) on gibberish like this instead of analyzing the risk inherent in their prop positions that guarantees the next CIO-like blow up will not be just $5 billion but far, far more, and will certainly prove that living wills when one has to equitize tens of billions in unsecured debt are worth exactly didely squat.

After two days of solid gains, European equities continue the upward trend and are seen higher at the North American crossover, with the Basic Materials sector leading the way, followed by financials. The moves in equities follow overnight reports from Chinese press, once again calling for the PBOC to slash their RRR, as well as expectations that this Thursday both the ECB and the BoE will conduct monetary easing, possibly boosting future commodity demand. In the fixed income markets, the European 2s/30s curve continues to see bear-steepening following last night’s announcement from the Dutch Central Bank that has changed Dutch insurers’ Solvency II interest rate curve; modifying the maturities in which the firms must hold assets towards the longer-end. Today also saw official confirmation from the Irish debt agency that they are to return to capital markets with T-bill issuance on July 5th, their first return to the market since 2010. Investor reaction to this news is evident in the shorter-end of the Irish yield curve, where the 2-yr bond yield spread against their German counterpart is firmly indicating the risk of returning to the market; currently wider by around 20bps.

Given the rather weak near-term and long-term outlook for US coal demand, it’s not surprising that within such a capital-intensive business, a number of smaller coal producers were hit recently with bankruptcy rumors. Indeed, even large cap names like Arch Coal have seen an escalation of concern over debt levels. Accordingly, many have concluded that coal -- in an era of solar, wind, and natural gas -- has finally displaced itself due to its problematic extraction, distant transportation, and overall costs. Is coal finally going away as an energy source?

Not a chance.

Indeed, everything currently unfolding for coal in the United States is precisely what is not unfolding for coal globally. Prices to import natural gas to most countries via LNG remain sky-high, easily protecting coal’s cost advantage. And the demand for coal in the developing world remains gargantuan. Accordingly, just as with oil, lower US demand simply frees up supply to elsewhere in the world. The global coal juggernaut rolls onward.

“A new breach in the dam”

It takes a lot of talent to do so much with so little.

“Pessimism has become tiresome, so optimism is gaining a foothold”