Macro blues overshadow crude oil
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.
Crude oil has been trading within the range of $75-$80 for the fourth consecutive week, with investors now focusing on a slowing economy and rising inventories in the United States, one of the top two oil consumers in the world.
However, the latest data indications from these two areas are not at all encouraging, and I will discuss some of them in the following sections.
Even more troubling …
A refinery utilization of 90.6%, close to the three-year high of 91.5% hit the week before.
A recovering 4-week average gasoline demand of 9.632 million b/d, just about 282.000 b/d lower than the all-time high of 9.681 million b/d in July 2007 (Fig. 1).
50% OPEC quota compliance
Although the extra OPEC production does not appear to have negatively impacted the price of oil yet, it is one of the major contributing factors to the rising stocks (Fig. 2).
Of course, one quarter of less than 3% growth post-crisis does not look too bad on its own. Nevertheless, considering the U.S. GDP went from 5% (revised down) in Q4 2009, to 3.7% in Q1 and 2.4% in Q2, a worrisome downward trend emerges − the economy is supposed to be getting stronger, instead of this fast deceleration seen in the past three quarters.
Labor market and consumer blues
The national unemployment rate is hovering close to 10%. With that, workers have no pricing power, are constantly stressed over job security and thus becoming thrifty. This is reflected in the rising consumer savings rate − 6.2% in Q2 − and the meager 1.6% year-over-year wage and salary increase in Q2 for all workers within the private industry.
On the other hand, companies, faced with high uncertainty in the economy and government policy, are reluctant to hire full time and rely primarily on “streamlining” and holding down headcount to boost profits.
Now, according to a Bloomberg survey, many economists are expecting unemployment to rise in July with the continuing cooling in the manufacturing and services sectors. This trend will likely keep a lid on household spending in the near to medium term.
In June, new-home sales were 330,000 units, the second lowest on record, while new Fannie and Freddie foreclosures increased sharply− up 21% in June from May.
With the expiration of first-time buyer credit, and 25% of the nation’s mortgages underwater, a further fall in home values and more delinquencies/defaults could significantly increase the risk of a double dip in the real estate sector, with the second half of 2010 being the most critical period.
However, billions of TARP infusion and guaranteed profits from the Fed’s almost free money have failed to incentivize banks to increase lending. Instead, banks are hoarding cash to shore up their capitals for more future bad loans and/or seeking higher returns through equities and commodities vs. lending.
A WSJ analysis of the 19 biggest TARP recipient banks published in April concluded that:
“Excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. Commercial lending slumped by about 40% over that period, the data indicate.”
One indicator with more significant crude oil demand implication is that China’s manufacturing (PMI) grew at the slowest pace in 17 months in July.
A synchronized global slowdown
At the same time, the United States is undergoing a longer-than-expected deflationary cycle insufficient for meaningful job creation and true demand growth. This also increases the odds of another recession in the U.S.
With the U.S. summer driving season basically over for this year and a slowdown in China, crude oil is expected to be under increasing pressure through the rest of the year, unless there are new strong indications that the U.S. economy has truly turned the corner.
Nevertheless, as the world’s reliance on fossil fuel will remain at 46% by 2050 (IEA projection), any price drop should provide investors with a good level to get into long positions.
Source: Dian Chu, Economic Forecasts and Opinions, August 2, 2010.
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