Energy prices were mixed last week.
The bulls ran out of the gate with gusto but stumbled by the end of the week despite bullish macro-economic news and a weak dollar. We may have seen a peak in net length according to the latest CFTC report. This week we will look for colder weather forecasts to lead a possible rebound in the natural gas market.
Last week The Schork Reportdiscussed mixed feelings about the latest U.S. trade balance data. On the big picture, we (and the talking heads on TV) are happy to report that the deficit decreased from $40.2 bn in December to $37.3 bn in January, a 7.2% drop. This bodes well for the economy in general, but much of the drop was due to a decline in crude oil imports.
This is bearish for the energy markets because low imports imply low demand which (in theory) implies lower prices. Consider that the value of crude oil imports dropped by 10% between December and January to 245 million barrels with a value of $18.1 bn. The value becomes distorted due to fluctuating prices – January 2008 saw a value of $27.2 bn as NYMEX WTI averaged $91.75 while January 2009 saw a value of $ 11.9 bn as NYMEX WTI averaged $41.68.
When we look at the absolute number of barrels, however, the picture becomes very clear.
January 2010 saw the number of barrels imported drop 11.4% to 245.27 million barrels, 18.3% below last year and 22.6% below the 2004-08 timestep.
Now The Schork Reportis all for energy independence, but unless T. Boone Pickens hooked up his wind farm while we weren’t looking, the U.S. hasn’t yet found a way to replace foreign oil. Traders cite Chinese demand as a boost for prices, but we are currently importing the lowest number of barrels since February 1999 – when NYMEX WTI was trading at $12.75 - and you have to wonder why the Chinese so desperately want to pay a $70 premium.
Between January 1999 and January 2006, the correlation between the number of barrels imported and the price of crude oil was a moderate 0.30 – as demand for barrels grew, so too did prices. Between January 2009 and 2010, the correlation reversed to -0.42. Demand for foreign oil is falling at a time when production at home is on the rise (Thunder Horse and Tahiti) in the GoM. Up through early March domestic crude oil output is averaging (5.47 MMbbl/d) 5.4% above a year ago and 3.4% above the 2004-2008 average. Net, net, U.S. demand for oil is falling… and prices are still rising.
It’s been a while since Econ 101, but rest assured our professor would weep. Right now, we cannot blame him.
As for the economy in general, we saw another round of good news with Friday’s manufacturing and trade inventories data, which were effectively unchanged at 1310.17 billion. For manufacturers, sales were 0.3% higher at $383.7 billion – that may not seem like much but it is 5.5% above 2009 and 3.7% below the 2004-08 timestep. Compare that to December 2009 where the deficit to the 2004-08 timestep clocked in at 5.5%. Manufacturers’ inventories rose 0.15%. This is also slightly positive for the energy sector as an increase in manufacturing is directly correlated with an increase in energy demand.
Over-all, total business sales are 6.8% above last year and 2.02% above the 2004-08 timestep. There is no denying that spending is returning to the economy, January 2009 was at a 15.3% year-on-year deficit. Therefore, turning to a near 7% surplus is hard to dismiss. However, much of these sales are intracommercial, and fuelled on credit, and commercial spending does not translate to consumer spending. Until we see a decrease in unemployment and an increase in consumer confidence, analysts at The Schork Report remain on guard for a double dip recession.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.