Schork Oil Outlook: Speculators vs Consumers

Personal Income/Expenditure: Earn a Little, Spend a Lot

Last week the Bureau of Economic Analysis released its personal income and outlays report for April 2011. From a big picture perspective, personal income rose by 0.4%, as expected by analysts, while spending rose by 0.4%, just below the 0.5% expected by the crowd.

The bright side is drawn and analyzed in today’s issue of The Schork Report : the disparity between personal expenditures and disposable income fell for the third consecutive month and now stands at $934.16 billion, its lowest level since February 2009 and 11.85% below February last year.

The disposition of incomes is also improving — compensation of employees rose to the highest level on record and 3.36% above last year, while income from dividends rose to $743.8bn, the highest since January 2009. The personal savings rate also held steady at 4.9%, well off last April’s 6.0%. Unfortunately, whether this is due to improving consumer confidence (today’s Omnium Gatherum section in today’s issue of The Schork Report suggests otherwise) or consumers forced to reduce savings to meet day-to-day expenses remains difficult to quantify.

One of the most striking numbers from April’s data came from government unemployment insurance benefits, which dropped from $117.9 in March to just $108.1 in April, 21.21% below April last year and the lowest level since February 2009. Yet, consider that while unemployment payments are lower than they have been in two years, we remain well above seasonal norms - between 2000 and 2008 unemployment benefits averaged just $36.17bn, as illustrated in today’s report .

On the other hand, total government benefits rose for the third consecutive month to their highest level on record, and it strikes us as disconcerting that government benefits to persons (including unemployment, health insurance and old-age benefits) have increased 3.45% over the last year while compensation to employees has risen just 3.36%.

Moving on, the BEA’s expenditure data is amongst the most detailed available. For instance, sales of used auto vehicles rose 0.29% and now stand 26.57% above last year, while sales of new auto vehicles fell 0.35% in April and stand 16.56% above last year. Consumers are likely scaling back on new cars and putting that money towards their gasoline bills - expenditure on auto fuels, lubricants and fluids rose 3.09% in April to $422.34bn, the highest level since September 2008 and the fifth highest level ever recorded.

Expenditure on gasoline and other energy goods as a percentage of total expenditure (PCE%GAS) rose to 4.19%. This is mild compared to historical highs of 6.00%+ as seen in the 80s, but given the current environment seems remarkably high. In post-1985 terms, we have only seen levels this high twice: once in September 2005, when the PCE%GAS rose to 4.18% and then collapsed to 3.47% by December ?05; and secondly, in the run up to the commodity bubble of 2008, when PCE%GAS hit 4.27% in November ?07, 4.40% by March ?08, 4.56% by June 2008 and then collapsed to 2.46% by December ?08.

With 2005 in mind, the sell-off in WTI in May should not have come as a surprise. Especially if one considers the increase in other essential commodities - coffee has been getting lot of press (pun intended) lately, and rightly so. Expenditure on coffee, tea and „other beverage materials? rose 0.93% to $11.24bn, the highest level ever recorded by a considerable margin. In fact, the YoY surplus in prices rose to 5.72%, the highest YoY increase since August 2008. Food in total jumped by 0.96% to $841.84bn. In turn, combined expenditure on food and gasoline as a percentage of total expenditure stands at 12.01%, the highest level seen except for the period between June 2008 - September 2008, as illustrated in today’s report .

The bottom line is that speculators seem to consider WTI below 100.00 to be “cheap.” For consumers, it is anything but.


Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.