Loose Ends

Feedback is the breakfast of champions.” – Ken Blanchard

In the 700 days since Doomberg went behind the paywall, we have published 167 pieces, inclusive of this one. Our commitment to our subscribers is to write 6-8 articles a month, and although we do not publish to a fixed schedule, we are proud to have delivered on this commitment, averaging one article roughly every 4.2 days. Given the number of predictions, opinions, and statements of fact embedded within that body of work, it is inevitable we will nail some calls while flubbing others. We don’t shy away from expressing a view, even a bold one, so long as we can show our homework.

As analysts with a mindset of continuous improvement, we have found it particularly useful to occasionally take a beat, look back on what we have published, and grade ourselves. It has been five months since we last aired our internal laundry – let’s string up the clothesline and see how we’ve done recently.

Cogent Analysis

We begin with a mea culpa. In “Cogent Analysis,” we linked the collapse in front-month natural gas contract prices directly to President Biden’s decision to halt export approvals for new liquefied natural gas (LNG) terminals. We attributed sentiment—and the market’s signal to producers that it was time to rein in supply—with the violently negative price action observed immediately after Biden’s announcement. A few of our subscribers with expertise trading such contracts objected to that assertion, arguing that unusually warm weather explained more of the variance. Although Biden’s move was not helpful, its impact could better be measured by observing changes in the out-months of the futures curve, which had only moved down roughly 10% on the news (versus 25% or more on the short end). After pondering the issue further, we have concluded that they are more right than we were and felt it important to say so publicly.

We believe mistakes such as these should be rare, admitted to, corrected, and learned from. Having discharged the first three of those steps, we now share what we’ve gleaned in the fourth. A common approach to measuring the impact of weather on the short-term demand for natural gas is to inspect heating degree-day data, a metric calculated by comparingthe mean (the average of the high and low) outdoor temperatures recorded for a location to a standard temperature, usually 65° Fahrenheit (F) in the United States.” The seasonality chart for aggregate US heating degree-days is indeed striking—visual testimony to how unusually warm this winter has been. Rumors of Biden’s LNG announcement coincided with the sharp turn in weather observed after January’s record cold spell.

Liquefied Natural Glut

For much of November, we embarked on a detailed analysis of the global natural gas market in preparation for that month’s Doom Zoom presentation to our Pro tier members. Marinating in the data, we saw clearly that the energy crisis of 2021-2022 led to a substantial wave of investment in both the exploitation of existing natural gas reserves and the construction of LNG terminals around the world. With many of these investments set to come online soon, the prospect of an imminent glut in the market could not be discounted. Frankly, our conclusion came as a bit of a surprise internally.

We next began to ponder the impact of such a development on other primary energy sources, especially coal and oil. We followed up our Pro tier presentation with a full article in early December, “Liquefied Natural Glut,” in which we signaled our belief that the world was entering a period of excess energy. We closed the article rather explicitly:

When energy is short, the world struggles to grow, countries rich in commodities hold the upper hand, and their currencies appreciate accordingly. In periods of excess energy, economic growth is easier to be had and the countries that add value to energy via downstream manufacturing reign supreme. Like the end of the drought in southern China, the avalanche of new natural gas supply coming online in the years ahead will usher in a period of significant excess.

To drive home the basis for our change in outlook and its importance to our evolving framework, we next sent a free copy of that November Doom Zoom session to all paying subscribers in advance of the holidays. We believed the world had changed, and we wanted as many of you to know about it as possible. Price action in the intervening months seems to confirm this call, as the futures curve for the Dutch TTF contract has continued to collapse since November. Even Biden’s LNG export approval pause failed to stem the bleeding. The world has flipped from short to long primary energy—at least for the time being.

Minority Report

Although we normally eschew politics in these pages, understanding how the political winds are blowing is a key input into the evolution of energy markets. On the rare occasion that we cover politics directly, our goal is to do so through an ideological lens, not a partisan one. Four months ago, we chronicled the backstory surrounding the ouster of former House Speaker Kevin McCarthy—his predecessor, Nancy Pelosi, had committed to support his speakership in the “unlikely event” that it came under attack, and her failure to do so at a critical moment was pivotal to his ultimate downfall. We pondered whether the Democrats might come to regret McCarthy’s departure, especially as it pertained to securing further funding for the war in Ukraine. Here is a key passage from that piece:

Setting aside the folly of taunting political opponents you’ll soon need to collaborate with, whether Biden’s gambit even succeeds is uncertain. The latest trial balloon indicates the White House may bundle ‘money for Ukraine, Taiwan, and U.S. border security along with financial assistance for Israel.’ The expanding pool of concessions being considered to get conservatives back onboard does not seem a projection of political strength, and the situation remains deeply fluid. Much depends on how quickly Republicans can settle on a new speaker (assuming they ever do), which bill gains the early momentum, and how strongly conservatives dig in on their opposition to Ukraine…

As the spiral of global conflict begins to resemble World War III, sharp political divisions within the US will have real consequences. Petty political partisanship, like that witnessed in the McCarthy toppling, threatens the West’s ability to devise a united strategy, let alone a coherent one. One can’t help but fear the world will be worse for it.

Sorry, pal | Getty

Events have since unfolded in a manner that fully validates our concerns. McCarthy’s replacement has indeed taken a much harder line, funding for Ukraine is still stuck in political limbo, and Russia has seized significant momentum on the battlefield.  The consequences of a possible total defeat of Ukraine—and by extension, the NATO alliance—have yet to be openly pondered by many in the Western media. We respectfully suggest such an outcome is far more likely than the public is being led to believe. The impact on energy markets would be profound, and we intend to keep a close eye on the situation.

Whack-A-Mole

The topic we are least happy to be most right about is the sheer idiocy of the West’s sanctions strategy against Russia. That it would not only fail but backfire has been a key theme of ours from nearly the moment the sanctions were unveiled in early 2022. In November, we dedicated a third piece to the topic, “Whack-A-Mole,” and wrote the following:

As the second anniversary of the war in Ukraine approaches, and with the abject failure of the West’s sanctions to dent Putin’s revenue vividly apparent, have our leaders learned anything? Sadly, nothing in their behavior would indicate so.

Unfortunately, things have only gone from dumb to dumber since then. Last week, both the US and Europe announced additional sanctions against scores of new entities, including—for the first time—individuals and companies in China and India. Here’s how the Financial Times covered the EU sanctions announcement:

The EU has agreed a [sic] new package of sanctions against Russia that for the first time targets Chinese and Indian companies accused of supporting Moscow’s war effort.

The measures, which will be the 13th package of sanctions imposed by Brussels in response to Russia’s full-scale invasion of Ukraine, target close to 200 individuals and entities but stop short of any sweeping economic action targeting crucial industrial sectors.

‘We must keep degrading [Vladimir] Putin’s war machine . . . [and] keep the pressure high on the Kremlin,’ European Commission president Ursula von der Leyen said in response to the sanctions agreement on Wednesday, adding that the measures also aimed to target ‘Russia’s access to drones.’

We hate to break it to von der Leyen, but these sanctions are about as likely to degrade Putin’s war machine as Xi Jinping is to treat you like a peer. That no member within the entourage of Western leadership circles has the faintest idea how self-destructive their attempts to sanction Russia are—and will continue to be—is one of the great mysteries of our time.

Gold in Resolution

Finally, last month we wrote on the subject of gold, speculating that 2024 could resolve two pressing issues: the metal’s future role in global trade as a neutral reserve asset, and whether its paper price was artificially suppressed in Western markets. On the first subject, we noted that the US and UK were pressing to seize some $300 billion of Russian foreign reserves, a move fraught with dangerous legal and geopolitical consequences. Analysts had pegged February 24, 2024, the second anniversary of the war between Russia and Ukraine, as the day it would likely occur. Well, the day has come and gone and calmer heads have prevailed, at least for now:

International banks have warned the UK government that it must establish legal principles before it presses the button on the seizure of billions of pounds of Russian assets, otherwise it risks potential shocks to the global financial system and exposing institutions to legal action.

Sweeping international sanctions, imposed after Moscow’s invasion of Ukraine in February 2022, froze an array of assets including about $300 billion owned by the Russian central bank. Now, on the second anniversary of the invasion, a global campaign by politicians and activists is demanding that the assets be seized and the proceeds sent to Kyiv.

US Secretary of State Antony Blinken and his UK counterpart David Cameron are among those who have called for seizures, while political leaders in the European Union have been more cautious. About two-thirds of the Russian central bank’s $300 billion is stuck in the Belgium-based clearing house Euroclear.

On the question of paper-market suppression, we noted that premium prices in Shanghai opened an arbitrage opportunity that would inevitably result in physical gold leaving vaults in New York and London to capture premium in the East. According to a Bloomberg index that tracks this premium, it has stubbornly persisted in the past month and might explain why gold has been consistently bid above $2,000 an ounce. We find this chart to be among the most interesting on our terminal, one we check multiple times a week.

Looking Ahead

We began this article with an admission of a mistake. Any analyst who publishes regularly in the finance and energy worlds will inevitably miss something, make a prediction that does not pan out, or inadvertently make a material misstatement. Nobody bats a thousand, certainly not us. Our goal is to still be publishing under the Doomberg masthead a decade from now (or more!), and a healthy dose of self-reflection makes for a solid investment in our sustainability as a team. We have much to cover in the months ahead and can’t wait to get at it!

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