Schork Oil Outlook: Recovery in Eye of the Beholder
Recently we saw two important macro-economic releases: industrial production and advance retail sales. The former is a useful gauge for the strength of manufacturers while the latter considers the make-up of consumer spending. The Schork Reporttakes notice of the discrepancy here.
Last year, growth in gasoline station receipts was outpacing the rest of the economy in huge measure, as consumers flocked to lower prices at the pump. 2009 saw total sales rise by 0.4% per month on average, while gasoline station receipts averaged a 2.4% rise.
How much of that increase can be regressed on price? Historically, a 1% increase (decrease) in prices leads to a corresponding 1.4% increase (decrease) in gasoline station receipts. So when prices at the pump fell 1.6% between October and November but gasoline station receipts rose 9.7%, we considered it a significant positive increase in demand.
Unfortunately, that demand enthusiasm appears to be waning: Prices at the pump fell 1.8% between January and February, and gasoline station receipts increased by 0.3%. This is impressive considering the terrible weather conditions and better than the historical relationship suggests, but well off the trend set by 2009.
Taking the bigger picture, total sales are also beginning to drop below the forecast trendline. Economists assumed the recovery was over in early summer 2009 as total sales outpaced the trend by 1.4%, but rising unemployment and dropping consumer confidence pushed sales 1.2% below the trend. A similar pattern played out in November in anticipation of Christmas spending, but unemployment claims remain high, house prices are weak and the economy, though better, currently stands 0.02% below where it should be. This economic-arc is confirmed by the industrial production numbers.
We were underwhelmed by industrial production in October, stating “The bottom line is that IP numbers were weaker than they should have been in a recovery” but bullish in December, calling the latest IP release “far more bullish” and even going so far as to worry about inflation, if that level of growth could be continued.
Of course, it could not — total IP rose by 0.07% between January and February. Compare that to the 0.67% increase between November and December and you have to question what happened to the momentum. Keep in mind, these are seasonally adjusted numbers, so Christmas demand/winter weather has already been factored out. Capacity utilization also rose by 0.20% in February compared to the 0.79% growth in November.
Economic growth is slowing, but whether it is prepping for a downturn or simply settling into a sustainable pace remains to be seen.
Primary metals production, a heavy user of coal and natural gas, fell for the first time since June 2009, dropping 0.11% to 82.4, which is 27% above February 2009 but still 25% below the preceding five year timestep. Chemicals production, useful as a gauge for the rest of the economy, also fell slightly, dropping 0.07% but it remains a strong 42% above last year and 30.10% above the preceding five year timestep.
On the breakdown, specific industries saw an uptick. Record breaking snow storms along the East Coast helped electric and gas utilities production rise by 0.5% which now stands 4.4% above last year and 3.8% above the 2004-08 timestep. Similarly, electric power generation, transmission and distribution rose by 0.8% and stands 4.0% above last year — a bullish signal for coal and natural gas demand.
Then again, natural gas distribution saw a 0.9% drop, but this may be due to weather making supply pipelines inaccessible. As a corollary, drilling oil and gas wells saw a 5.8% rise and the year-on-year deficit narrowed from 21.4% in January to just 1.7% in February.
The bottom line is that spending, both commercial and retail, is better in absolute terms. Analysts at The Schork Reportare concerned about the slowdown in the rate of change, i.e., the double differential argument — which the pundits loved when it implied that the decline was slowing down, but don’t seem to mention when the rate of growth is slowing down.
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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.