Yesterday we discussed the small increases seen by the Consumer Price Index (CPI). Prices in March grew by just 0.1%, leading to a cumulative gain of 0.7% since the start of the year.
Did consumers, who saw income increase by 0.09% over the same period, respond to increased purchasing power by spending more?
The latest retail sales figures signal yes for the economy, but paint a very bearish picture for crude oil prices.
Looking at the big picture, total retail sales for March increased by 1.6%, the largest month-on-month gain since November and well above the 1.2% expected by analysts. February’s disappointing figures were also revised higher. Last month, we calculated February’s figure to be 0.5% below the forecast trend-line, as shown in the Chart of the Day in today’s issue of .
In a pleasant (for once) surprise, the U. S. Census Bureau revised total retail sales for February from $355.55 billion to $357.47 billion — a 0.5% upward revision. Similarly, January’s original figure was 0.3% below our forecast and saw an upward revision of 0.4%.
It is no longer risky to say that the economy is picking up, but we are troubled by gasoline station receipts. Even though urban areas saw a decrease in the price index, the national average of prices at the pump increased from $2.71 to $2.85 in March, a 5.24% gain. Our analysis suggests that, historically, a 1% increase in retail prices leads to a 1.4% increase in total gasoline station receipts. Instead, March saw gasoline station receipts drop by 0.3%, from $34.86 bn to $34.72 bn.
Significant demand destruction appears to have taken place during the great recession. Prices are now approaching the top price quintile of >$2.86 and consumers are increasingly unwilling, or unable to pony up at the pump. The last time prices hit $2.85, in September 2007, gasoline station receipts were much higher, at $36.5 bn. Compare that to November 2009, when prices were around $2.68 and gasoline station receipts were $34.25 bn. The last time prices were at a similar level, August 2005, receipts came to $32.49 bn. Put simply, when prices are at $2.68, we see demand above historical levels. When prices are at $2.86, we see demand below historical levels.
We do not mean to sound like a broken record when it comes to high crude oil prices, but there is no other way to put this. The bullish banks repeatedly claim that demand will return as the economy improves, and refiners can pass the high cost of crude on to the consumer. Well, the economy is improving, but consumers have started to walk away from gasoline at prices they cannot afford. Refiners cannot pass on the costs, and the major oil players are hemorrhaging money on the downstream. And still the May contract ran above $87 last week.
The bulls are carrying out an experiment of high crude oil prices based on the assumption that demand will catch up. In our line of thinking, that logic is perplexing (to be polite), i.e., in a fundamentally bullish market does not demand push price, rather than price pull demand? To wit, if the market were truly concerned about pending supply imbalances relative to perceived demand, wouldn’t the WTI and Brent markets already be trading in backwardation prior to the summer driving season?
Be that as it may, Wall Street has been telling us for the last year oil prices belong at $85. So we are here… now what? As we saw with their Q4 2009 earnings, refiners could not make money at $70. Thus, analysts at predict odds are long they could make ends-meet at $85 in Q1 2010. Bottom line, North American and European consumers are going to be hard pressed this summer to pay the premium Wall Street is forcing upon him. Thus, demand has not, and likely will not, rise to meet high prices at the pump.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.