US Dollar Index … Expect Volatility

Commodities, priced in US Dollars, have been rising over recent days. We seldom comment on the US Dollar Index (symbol: DX), however we do track the index closely to understand the potential influence on US Dollar denominated commodity prices. The US Dollar Index has been in consolidation mode since Mar15, slightly over one year. The chart below reflects US Dollar Index futures in weekly increments dating back to 2006.

US Dollar Index Chart1, 17Mar16

The trading range formed over the last year is important. The boundaries set by that range, 92.41 to 100.60, when penetrated, will help define the direction of the next US Dollar Index move. Breakout above 100.60 suggests a target of 118.00. Breakout below 92.41 suggests a test of 89.71.  Failure of 89.71 means much lower.

Regardless of which direction the breakout occurs, expect strong volatility … price movements should be sharp. In addition, look for commodities to react in the opposite direction. A US Dollar Index breakout to the upside should pressure commodity prices. Conversely, a US Dollar breakout to the downside should move commodities higher.

Murphy & Co’s position model focuses on commodity and equity futures markets, and does not currently recommend positions in currency markets.  To learn more about Murphy & Co’s position models, visit

Tagged with: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

US Natural Gas … New Production Continues to Offset Legacy Production – #NaturalGas #CrudeOil

Seven key tight oil and shale gas regions accounted for 92% of domestic oil production growth and 100% of domestic natural gas production growth during the 2011-2014 period. Those key seven regions are shown in the below map.

Key US Tight Oil and Shale Gas Regions, 09Jan16

Both natural gas and crude oil have experienced substantial price declines since 2014 as can be seen in the below charts of front month futures prices dating back to 2005.

Natural Gas

NatGas Chart, 09Jan16

Crude Oil

Crude Oil Chart, 09Jan16

We would expect substantially lower price at the wellhead would translate into lower production levels, after all, the cure for low prices should be low prices.

We also recognize that nearly all wells produce some combination of natural gas and crude oil, such that from a producer’s perspective, higher prices from one commodity can offset lower prices from the other. Higher crude oil prices from 2010 thru mid 2014 essentially enabled higher associated natural gas production. However, the collapse of both crude oil and natural gas prices since mid 2014 should have resulted in substantial production declines by now. For the remainder of this discussion we focus on natural gas production.

Murphy & Company’s US natural gas production forecast model suggests domestic production should have began decline during the summer of 2015. To date, this has not been the case.

US NG Marketed Production Model, 09Jan16

An examination of new well gas production vs legacy well production decline provides some answers. The following table details the change in natural gas production from the seven key shale gas regions for the period Jan15 versus Dec15, in MMcf/d.

Change in Natural Gas Production, 09Jan16

While new drilling activity is substantially lower, improved early production from new wells is substantially offsetting the decline from legacy wells.

Furthermore, the following table demonstrates the impact on drilling economics based upon the expected ratio of crude oil vs. natural gas production for the average of 2015 vs. current prices.

Production Economics relative to Crude Oil and Natural Gas Mix, 09Jan16

At current prices, new wells can only be justified at partial recovery of full book costs. Furthermore, at current natural gas prices, any new natural gas well is almost certainly justified on a cash cost basis only.

Absent immediate production declines, crude oil and natural gas prices are almost certainly to move lower.

Murphy & Company, LLC may hold long or short positions in crude oil or natural gas.

Tagged with: , , , , , , , , , , , , , , , , , , , , , , ,

Silver Fundamentals and US Bank Holdings

The Trend Beacon’s 28Sep15 edition examined the global Silver market relative to the precious metals holding of insured US Banks as reported in the Office of the Comptroller of the Currency’s (OCC’s) 1Q2015 Report on Bank Trading and Derivatives Activities. We expect substantial price volatility in precious metals is on the horizon. Here’s a reprint of the article:

Featured Article: Silver Fundamentals and US Bank Holdings
September 26, 2015 by murph

Only 31% of 2014 silver production came from primary silver mines where silver is the main source of revenue. Approximately 68% was associated with lead/zinc (35%), copper (20%), and gold (13%) production. The following chart displays the components of global silver supply for the 2005-2014 period.

World Silver SupplyAll global silver supply and demand data in the following charts are provided courtesy of Thomson Reuters GFMS and The Silver Institute (

Falling metals prices has taken its toll on global mining operations. After 12 straight years of gains, global silver production is expected to fall in 2015. With profits under pressure, silver mining companies have focused on cost cutting.

The chart to the right displays the components of global silver demand for the 2005-2014 period.World Silver Demand Demand growth over the period has been led by coins & bars (investment attribute) and photovoltaic demand (industrial attribute).

Industrial silver demand is expected to grow at an accelerating pace off the back of increased photovoltaic demand, which in turn will be driven by reduced electrical storage costs. Advances in battery technology are expected to reduce the cost of electricity storage by 50% by 2020, and by 50% again by 2024. The net impact will be increased photovoltaic demand.

The chart to the left displays global silver demand with focus on investment demand. World Silver Investment DemandInterestingly, investment demand has remained robust over the last four years, despite lower silver prices. Additionally, investment demand growth over the last four years has primarily focused on physical coins and bars while ETFs have seen little inventory build.

Current metals prices are insufficient to justify mine expansion, not to mention new mine development. Any substantial uptick in demand, whether it be industrial or investment driven, will drive silver prices higher. Such movements could be sudden and volatile.

Based on the Office of the Comptroller of the Currency’s (OCC’s) 1Q2015 Report on Bank Trading and Derivatives Activities, insured US commercial banks appear to be substantially increasing their positions in precious metals. The following chart, courtesy of the OCC, identifies historical holdings of precious metals ‘contracts’ in $US billions.

OCC Precious Metals 1Q15

Holdings increased from $22.4 billion in 4Q14 to $75.6 billion in 1Q15. Further OCC reporting suggests the 1Q15 precious metals activity can be linked to JP Morgan Chase, Bank of America, Citibank, and/or Goldman Sachs. We searched for, but are not able to confirm:
– the split between precious metals (gold vs. silver vs. platinum, etc)
– the split between exchange traded vs. over-the-counter contracts
– the degree to which the ‘contracts’ are backed by physical holdings, or
– whether the ‘contracts’ represent long or short positions.

To place these figures in context, the total market cap (open interest x contract size x $/oz) of the sum of the gold, silver, platinum and palladium futures markets at The CME Group is $65.8 billion.

Furthermore, the total eligible physical inventories on record at CME Group as of 25Sep15 are as follows:

CME Group Eligible Table

The 1Q15 leap in OCC reported precious metals ‘contracts’ held by insured US banks is substantial relative to the US futures market and eligible physical on hand.  (End of article.)

The Trend Beacon is a weekly commentary with focus on select global natural resource markets. Our goal is to add value to your investment decision process through the delivery of long-term and short-term perspectives in the energy, metals, and agricultural markets.

To learn more about The Trend Beacon, click learn more.


Tagged with: , , , , , , , , , , , ,

Chinese Equity Market … The Trend Beacon Got It Right!

The Trend Beacon described the Chinese equity market as “overheated” in its featured article from the 23May15 edition, three weeks prior to the 15Jun15 top. Here’s a reprint of the article:

Featured Article: Chinese Equity Market … Overheated
May 23, 2015 by murph

If you took a long position in the Dow Jones China Broad Market Index (DJCHINA) one year ago today, you would have a 142% return. Not bad for one year’s work. The chart below displays the price history of the index (symbol: $DJCHINA) dating back to 2003.

$DJCHINA Weekly Chart, 23May15

The chart appears to be in an extended position, exhibiting characteristics of a blow-off top. To that, we overlay this week’s news regarding the chairman of Hong-Kong listed Hanergy Thin Film Power … Mr. Li Hejun’s net worth plummeted an estimated 50%, or $14 billion. Some studies have pointed to the lack of liquidity in the issue as the primary cause … offer volumes were substantially higher than bid volumes.

A review of Murphy & Company’s proprietary Overbought vs Oversold indicator for the Dow Jones China Broad Market Index offers a compelling view.

DJCHINA Index, Indicator, 23May15

Our work suggests the $DJCHINA Index is in an extremely overbought situation. We suspect a severe and volatile correction is near. (End of article.)

The Trend Beacon is a weekly commentary with focus on select global natural resource markets. Our goal is to add value to your investment decision process through the delivery of long-term and short-term perspectives in the energy, metals, and agricultural markets.

To learn more about The Trend Beacon, click learn more.

To sign up for a 60 day, no risk, free trial of The Trend Beacon, click free trial.

Tagged with: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

US Gasoline Season … Quiet and On Schedule

The US Gasoline season typically runs from Memorial Day to Labor Day, normally representing the season of highest demand. It’s also the window when supply/demand pressures can assert substantial impact on price. With that said, it’s been a relatively quiet, uneventful gasoline season to date.

The following chart provides a two year look at US gulf coast gasoline prices (symbol: RB). The second half 2014 price decline was driven by collapsing crude oil input costs. Gasoline’s recent low was recorded at $1.2265/gal on 13Jan15 and the high of 2.1857/gal on 17Jun15, representing a 78% valley to peak price advance this year.

RBOB Daily Chart, 24Jun15

Our target for this move is the $2.40-2.50/gal range. Murphy & Co’s proprietary Overbought vs. Oversold Indicator provides a view of where we stand in regards to gasoline’s price  progression.

RBOB Overbought vs Oversold Chart, 24Jun15The Buy and Sell Zones are statistically computed and are intended to convey an opportunity to enter or exit a position or sector. Each gasoline nozzle represents a unique historical snapshot of the indicator, i.e., the largest represents the snapshot from 19Jun15, the next largest end 1Q15, the next end 4Q14, then 3Q14, and the smallest 2Q14. The historical snapshot pattern helps the user to generate confidence in the indicator. While the indicator is not in the sell zone just yet, we expect the pattern will complete before or near Labor Day.

For more on Murphy & Co’s Overbought vs. Oversold Indicators, check out The Trend Beacon.

Tagged with: , , , , , , , , , , , , , , , , , , , , , ,