These Startling Charts Explain Lack of Consensus

|
 |  Includes: CRB, UNG, USO
by: Matt Smith

I can't recall a time when consensus has been so hard to come by as to whether prices are set to rally or crash, be they in commodities, equities, bonds, or currencies. So to add to the confusion, here are 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 (below 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 (below 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).

Click to enlarge

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:

Click charts below to enlarge

Click to enlarge

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, Okla., 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:

Disclosure: No positions