Yesterday (Wednesday), the heating oil contract led the Nymex liquids complex after a large draw in distillate inventories from the DOE. The heating oil crack hit an intra-day high of $24.814, the highest since April 20. But traders may have overlooked a report that was far less bullish for distillate demand.
According to the U.S. Census bureau’s Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders, new orders in April fell by 3.6% as compared to the 2.5% drop expected by analysts and the 2.5% gain seen in March. More directly relevant to diesel demand, shipments of manufactured durable goods fell 1.0%, its first drop in five reports and a stark contrast to the 3.1% increase seen for March.
The weakness is not confined to distillates — new orders of motor vehicles and parts fell by 4.5% while the ratio of inventories to shipments rose to 2.28.
We are stocking vehicles, but do we have anyone to ship them to?
In that vein, inventories of petroleum/coal rose 2.46% to the highest point since September 2008 while transportation orders fell 9.47% on the month, the largest drop in percentage terms since December 2010.
All told, the report was decidedly troubling for domestic demand for fuel, be it via demand for transporting goods, or goods which directly consume petroleum.
So did traders simply ignore the durable goods report to focus on the DOE? Not quite.
In addition to the direct measure of consumption, the report was a barometer for economic health, or in this case, malaise. On the other hand, yesterday the UK reported a 0.5% increase in GDP for the first quarter of 2011, suggesting that austerity measures are helping boost the economy. This would put pressure on the Bank of England to ramp up interest rates which would, in turn, increase the strength of sterling. A stronger sterling implies a weaker dollar, and a weaker dollar implies…that’s right, higher crude oil prices.
Given that exports of all products rose to 2.16 MMbbls/d, the highest level ever seen for this timestep, analysts at The Schork Report suggest that traders may be betting on macro-economic correlations and global crude oil/distillate demand regardless of domestic economic health.
We all know how well that worked out in the summer of 2008.
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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.