November 2018 Residential Sales, Inventory and Prices

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Sales of new single-family houses in November 2018 have not been reported because of the federal government’s ongoing partial shutdown. 

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Existing home sales added to gains in November (+100,000 units), rising to a SAAR of 5.32 million units (5.190 million expected). Inventory of existing homes for sale shrank in both absolute (-110,000 units) and months-of-inventory (-0.4 month) terms. Because new-home sales have not been reported, the share of total sales comprised of new homes is incalculable. The median price of previously owned homes sold in November advanced to $255,700 (+$2,600 or 1.0% MoM). 

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Housing affordability settled lower although the median price of existing homes for sale in October dropped by $1,400 (-0.5%; +4.3 YoY), to $257,900. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices slowed to a not-seasonally adjusted monthly change of +0.1% (+5.5% YoY).

“Home prices in most parts of the U.S. rose in October from September and from a year earlier,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The combination of higher mortgage rates and higher home prices rising faster than incomes and wages means fewer people can afford to buy a house. Fixed rate 30-year mortgages are currently 4.75%, up from 4% one year earlier. Home prices are up 54%, or 40% excluding inflation, since they bottomed in 2012. Reduced affordability is slowing sales of both new and existing single family homes. Sales peaked in November 2017 and have drifted down since then.

“The largest gains were seen in Las Vegas where home prices rose 12.8% in the last 12 months, compared to an average of 5.3% across the other 19 cities. This is a marked change from the housing collapse in 2006-12 when Las Vegas was the hardest hit city with prices down 62%. After the last recession, Las Vegas diversified its economy by adding a medical school, becoming a regional center for health care, and attracting high technology employers. Employment is increasing 3% annually, twice as fast as the national rate.” 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

3Q2018 Gross Domestic Product: Third Estimate

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In its third estimate of 3Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pared the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +3.35% (+3.5% expected), down 0.15 percentage point (PP) from the second estimate (“3Qv2”) and -0.80PP from 2Q2018.

Three groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 3Q growth. Net exports (NetX) detracted from growth.

Although the revisions might justifiably be characterized as statistical noise -- especially since part of the retreat in the headline number resulted from a fractional increase in the GDP price index -- they generally reinforce trends apparent in the economy since 2Q. E.g., consumer spending, commercial fixed investment and exports were revised lower, while inventories were upwardly revised yet again. As for details:

Downward revisions --
Consumer spending: -0.08PP (-0.20PP relative to 2Q).
Fixed investment: -0.04PP (-0.89PP from 2Q).
Net exports: -0.08PP (-3.21PP from 2Q).

Upward revisions --
Inventories: +0.06PP (+3.50PP from 2Q).

As a consequence, real 3Q final sales of domestic product (which exclude inventories) were trimmed for a second time (-0.21PP from 3Qv2, to +1.02%), 4.30PP below the 2Q2018 estimate. 

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“Although none of the revisions in the report were material by themselves, their combined net effect reinforced the previous report's story -- that the growth rates for consumer and commercial spending was weakening, with inventories growing as a consequence,” remarked Consumer Metric Institute’s Rick Davis. “Additionally, foreign trade is now removing another -3.21% from the headline, quarter over quarter.

“The BEA tells us that the key number in any of their GDP reports is the ‘real final sales of domestic product.’ That number is now reported to be down an alarming -4.30% from the prior quarter.

“As we have mentioned before,” Davis concluded, “this report shows an economy that appears to be either coasting or at an inflection point. The results from the fourth quarter should tell us much more about what direction it is heading.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

2018Q4 Macro Pulse -- 2018 in Review

It seems like only yesterday the world was ringing in the new year, and now the bow is nearly tied around 2018. If the old saying is true that “past is prologue,” perhaps it is fitting to take a broader retrospective of the U.S. economy than is typical – or even possible – in our other publications. Taking stock of recent events within the context of the business cycle provides more clarity about the economy’s future direction.

Click here to read the rest of the December 2018 Macro Pulse recap.

The Macro Pulse blog is a commentary about recent economic developments affecting the forest products industry. The quarterly Macro Pulse newsletter typically summarizes the previous 30 to 90 days of commentary available on this website.

November 2018 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in November at a seasonally adjusted annual rate (SAAR) of 1,256,000 units (1.222 million expected). This is 3.2% (±9.8%)* above the revised October estimate of 1,217,000 (originally 1.228 million units), but 3.6% (±9.4%)* below the November 2017 SAAR of 1,303,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -2.0%.

Single-family housing starts in November were at a rate of 824,000; this is 4.6% (±8.4%)* below the revised October figure of 864,000 (-12.7% YoY). Multi-family starts: 432,000 units (+22.4% MoM; +23.6% YoY).

* 90% confidence interval (CI) is not statistically different from zero. The Census Bureau does not publish CIs for the entire multi-unit category. 

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Completions in November were at a SAAR of 1,099,000. This is 0.4% (±8.7%)* above the revised October estimate of 1,095,000, but 3.9% (±11.5%)* below the November 2017 SAAR of 1,144,000 units; the NSA comparison: -3.5% YoY.

Single-family housing completions were at a SAAR of 772,000; this is 5.4% (±7.6%)* below the revised October rate of 816,000 (-1.8% YoY). Multi-family completions: 327,000 units (+17.2% MoM; -7.8% YoY). 

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Total permits were at a SAAR of 1,328,000 units (1.258 million expected). This is 5.0% (±1.6%) above the revised October rate of 1,265,000 (originally 1.263 million units) and 0.4% (±1.7%)* above the November 2017 SAAR of 1,323,000 units; the NSA comparison: +2.9% YoY.

Single-family permits were at a SAAR of 848,000; this is 0.1% (±1.4%)* above the revised October figure of 847,000 (-1.8% YoY). Multi-family: 480,000 (+14.8% MoM; +10.9% YoY). 

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Builder confidence in the market for newly-built single-family homes fell four points to 56 in December on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) as concerns over housing affordability persist. Although this is the lowest HMI reading since May 2015, builder sentiment remains in positive territory.

“We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs,” said NAHB Chairman Randy Noel. “However, recent declines in mortgage interest rates should help move the market forward in early 2019.”

“The fact that builder confidence dropped significantly in areas of the country with high home prices shows how the growing housing affordability crisis is hurting the market,” said NAHB Chief Economist Robert Dietz. “This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply-side costs to keep home prices competitive for buyers at different price points.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2018 International Trade (Softwood Lumber)

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Softwood lumber exports turned higher (31 MMBF or +26.3%) in October, but imports receded further (25 MMBF or -1.9%). Exports were 1 MMBF (+0.8%) above year-earlier levels; imports were 95 MMBF (-6.8%) lower. As a result, the year-over-year (YoY) net export deficit was 96 MMBF (7.8%) smaller. Also, the average net export deficit for the 12 months ending October 2018 was 1.4% smaller than the average of the same months a year earlier (the “YoY MA(12) % Chng” series shown in the graph above). 

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North America (of which Canada: 20.5%; Mexico: 20.9%) and Asia (26.6%; especially China: 12.9%) were the primary destinations for U.S. softwood lumber exports; the Caribbean ranked third with a 25.2% share. Year-to-date (YTD) exports to China were -8.1% relative to the same months in 2017. Meanwhile, Canada was the source of most (87.3%) of softwood lumber imports into the United States. Imports from Canada were 2.7% lower YTD than the same months in 2017. Overall, YTD exports were up 4.2% compared to 2017, while imports were down -1.0%. 

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U.S. softwood lumber export activity through the Gulf customs region represented the largest proportion (33.4% of the U.S. total), followed by the West Coast region (29.4%) and the Eastern (28.3%) regions. Moreover, Mobile (20.8% of the U.S. total) overtook Seattle (16.0%) as the single most-active district; Savannah: 13.0%. At the same time, Great Lakes customs region handled 61.4% of softwood lumber imports -- most notably the Duluth, MN district (27.0%) -- coming into the United States. 

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Southern yellow pine comprised 29.0% of all softwood lumber exports, Douglas-fir (9.6%) and treated lumber (14.0%). Southern pine exports were up 4.6% YTD relative to 2017, while treated: -7.5%; Doug-fir: -8.9%.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2018 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) rose 0.6% in November (+0.3% expected) after moving down 0.2% in October; the index for October was previously reported to have edged up 0.1%. In November, manufacturing production was unchanged, the output of mining increased 1.7%, and the index for utilities gained 3.3%. At 109.4% of its 2012 average, total IP was 3.9% higher in November than it was a year earlier. 

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Industry Groups

Manufacturing output was unchanged in November, as an increase of 0.2% for durable manufacturing was offset by decreases of 0.2% and 0.9% for nondurable manufacturing and other manufacturing (publishing and logging), respectively. Within durable manufacturing, primary metals posted a gain of nearly 2.5%; no other major industry group recorded a gain of more than 0.5% and several recorded losses (wood products: -0.3%). Among nondurables, most major categories posted declines (paper products: -0.1%).

Mining output advanced 1.7% in November, with gains in oil and gas extraction, coal mining, and support activities for mining; the index for mining was 13.2% above its level of a year earlier. The output of utilities rose 3.3% in November, with increases for both electric and gas utilities; natural gas distribution rose sharply in both October and November, as unseasonably cold weather supported demand for heating. 

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Capacity utilization (CU) for the industrial sector rose 0.4 percentage point (PP) in November to 78.5%, a rate that is 1.3PP below its long-run (1972–2017) average.

Manufacturing CU edged down in November to 75.7%, about 2.5PP below its long-run average (NAICS manufacturing: -0.1%, to 76.3%), as a slight rise for durables (wood products: -0.6%) was outweighed by declines for nondurables (paper products: 0.0%) and other manufacturing (publishing and logging). The utilization rate for mining increased to 94.1% and remained well above its long-run average of 87.0%. The operating rate for utilities moved up to 79.4%, a rate that is about 6PP below its long-run average. 

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Capacity at the all-industries level nudged up 0.2% (+2.0 % YoY) to 139.4% of 2012 output. Manufacturing (NAICS basis) rose fractionally (+0.1% MoM; +1.5% YoY) to 138.9%. Wood products: +0.3% (+3.5% YoY) to 163.8%; paper products: -0.1% (-0.9 % YoY) to 110.4%.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2018 Consumer and Producer Price Indices (incl. Forest Products)

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Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November (0.0% expected). The gasoline index declined 4.2% in November, offsetting increases in an array of indexes including shelter and used cars and trucks. Other major energy component indexes were mixed, with the index for fuel oil falling but the indexes for electricity and natural gas rising. The food index rose in November, with the indexes for food at home and food away from home both increasing. 

The all items less food and energy index increased 0.2% in November. Along with the indexes for shelter and used cars and trucks, the indexes for medical care, recreation, and water and sewer and trash collection also increased. The indexes for wireless telephone services, airline fares, and motor vehicle insurance declined in November.

The all-items index increased 2.2% for the 12 months ending November, compared to a 2.5% increase for the period ending October. The all items less food and energy index rose 2.2% in November. The energy index increased 3.1% for the 12 months ending November; this was its smallest 12-month increase since the period ending June 2017. The food index rose 1.4% over the last 12 months. 

Producer Price Index

The Producer Price Index for final demand (PPI) edged up 0.1% in November (0.0% expected). Final demand prices advanced 0.6% in October and 0.2% in September. The rise in the final demand index can be traced to a 0.3% increase in prices for final demand services. In contrast, the index for final demand goods decreased 0.4%.

The final demand index moved up 2.5% for the 12 months ended in November. The index for final demand less foods, energy, and trade services moved up 0.3% in November, the third consecutive increase. For the 12 months ended in November, prices for final demand less foods, energy, and trade services advanced 2.8%.

Final Demand

Final demand services: The index for final demand services moved up 0.3% in November, the third straight rise. The broad-based November advance was led by a 0.3% increase in the index for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services climbed 1.2%, and the index for final demand services less trade, transportation, and warehousing inched up 0.1%.

Product detail: Most of the November advance in prices for final demand services can be traced to margins for fuels and lubricants retailing, which jumped 25.9%. The indexes for health, beauty, and optical goods retailing; cellular phone and other wireless telecommunications services; airline passenger services; food wholesaling; and truck transportation of freight also moved higher. Conversely, prices for guestroom rental fell 3.5%. The indexes for machinery and equipment wholesaling and for portfolio management also declined.

Final demand goods: The index for final demand goods moved down 0.4% in November, the largest decrease since falling 0.5% in May 2017. The November decline was the result of a 5.0% drop in the index for final demand energy. In contrast, prices for final demand goods less foods and energy climbed 0.3%, and the index for final demand foods advanced 1.3%.

Product detail: Leading the November decrease in the index for final demand goods, gasoline prices dropped 14.0%. The indexes for liquefied petroleum gas, electric power, fresh fruits and melons, jet fuel, and primary basic organic chemicals also moved down. Conversely, the index for pharmaceutical preparations rose 1.5%. Prices for fresh and dry vegetables and for residential natural gas also increased. 

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The not-seasonally adjusted price indexes we track were mixed on both MoM and YoY bases. Most noteworthy are the MoM and YoY decreases in softwood lumber. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment in November rose by 155,000 jobs -- well below expectations of +190,000. Combined September and October employment gains were revised lower (September: -13,000; October: +1,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) remained at 3.7% because the number of those who found employment (+233,000) exceeded new/re-entrants to the labor force (+100,000). 

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Observations from the employment reports include:

* The household (233,000 more people employed) and establishment (+155,000 jobs) survey results were at least directionally consistent, if again somewhat out of sync.

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors; that does not appear to have occurred in November. Imputed jobs from by the CES (business birth/death model) adjustment were below average for the month of November (since 2000), and the BLS subtracted an above-average seasonal adjustment from the base data. Had average November adjustments been used, employment may have been a more-sprightly +295,000 instead of the reported +155,000.

* As for industry details, Manufacturing expanded by 27,000 jobs. That result is consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in November at a faster pace than in October. Wood Products employment gained 700 jobs (ISM was unchanged); Paper and Paper Products: +700 (ISM increased). Construction employment added 5,000 (ISM increased). 

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* The number of employment-age persons not in the labor force (NILF) advanced by 60,000 (+0.1%), to 95.9 million. The employment-population ratio was unchanged at 60.6%; thus, for every five people being added to the population, roughly three are employed. 

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* Similarly, the labor force participation rate (LFPR) remained at 62.9% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.06, to $27.35, resulting in a 3.1% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.07, to $22.95 (+3.2% YoY). Since the average workweek for all employees on private nonfarm payrolls shrank by 0.1 hour (to 34.4 hours), average weekly earnings decreased by $0.67 (-0.1%), to $940.84 (+3.1% YoY). With the consumer price index running at an annual rate of 2.5% in October, workers are gaining a bit of ground -- officially, at least -- in terms of purchasing power. 

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* Full-time jobs increased (543,000). Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work -- rose by 181,000; non-economic reasons: -604,000. Those holding multiple jobs: -142,000. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld fell in November, by $10.8 billion (-5.5% MoM; -2.5% YoY), to $186.2 billion. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending November was 2.1% below the year-earlier average -- well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2018 Manufacturers’ Shipments, Inventories, and New & Unfilled Orders

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According to the U.S. Census Bureau, the value of manufactured-goods shipments in October decreased $0.5 billion or 0.1% to $508.4 billion. Durable goods shipments decreased $1.2 billion or 0.5% to $254.6 billion led by transportation equipment. Meanwhile, nondurable goods shipments increased $0.7 billion or 0.3% to $253.7 billion, led by petroleum and coal products. Shipments of wood products slid by 1.1%; paper: -0.6%. 

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Inventories increased $0.9 billion or 0.1% to $681.7 billion. The inventories-to-shipments ratio was 1.34, unchanged from September. Inventories of durable goods increased $0.3 billion or 0.1% to $411.3 billion, led by transportation equipment. Nondurable goods inventories increased $0.6 billion or 0.2% to $270.3 billion, led by chemical products. Inventories of wood products expanded by 0.3%; paper: -0.1%. 

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New orders decreased $10.5 billion or 2.1% to $502.7 billion. Excluding transportation, new orders rose by 0.3% (+7.2% YoY). Durable goods orders decreased $11.2 billion or 4.3% to $249.0 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- was unchanged (+4.7% YoY). New orders for nondurable goods increased $0.7 billion or 0.3% to $253.7 billion.

As can be seen in the graph above, real (inflation-adjusted) new orders were essentially flat between early 2012 and mid-2014, recouping on average less than 70% of the losses incurred since the beginning of the Great Recession. The recovery in real new orders is back to just 58% of the ground given up in the Great Recession. 

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Unfilled durable-goods orders decreased $1.7 billion or 0.1% to $1,183.6 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.70, up from 6.65 in September. Real unfilled orders, which had been a good litmus test for sector growth, show a much different picture; in real terms, unfilled orders in June 2014 were back to 97% of their December 2008 peak. Real unfilled orders then jumped to 102% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Thereafter, however, real unfilled orders gradually declined and have turned higher only since 2018 began.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in November the expansion in U.S. manufacturing regained some of the ground lost in October. The PMI registered 59.3%, up 1.6 percentage points (PP) from the October reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Perhaps most notable, input price pressure relaxed in November. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also accelerated (+0.4PP) to 60.7%. Input price growth accelerated.

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Of the industries we track, only Wood Products and Ag & Forestry did not expand. "Commercial construction is strong,” commented a Construction respondent. “Employment is struggling due to lack of qualified talent."

Relevant commodities:
* Priced higher -- Labor (general and construction); and paper.
* Priced lower -- Lumber and lumber products; and fuel.
* Prices mixed -- None.
* In short supply -- Construction subcontractors; labor (general, construction and temporary); and trucking.

IHS Markit’s November survey headlines were less positive than ISM’s, but the internal details were generally consistent.

Manufacturing -- Output expands at joint-weakest rate since September 2017

Key findings:
* Production growth eases but remains strong
* New orders rise at fastest rate for six months
* Employment increases solidly

Services -- Slowest new business growth since October 2017

Key findings:
* New order expansion remains solid
* Strong upturn in business activity
* New export orders increase at fastest rate since May

Commentary by Chris Williamson, Markit’s chief business economist:

Manufacturing -- "Despite the headline PMI slipping to a three-month low, November saw manufacturers enjoy another encouragingly solid month of improving business conditions.

“Dig deeper behind the headline number and the picture brightens further. New orders rose at the fastest rate for six months, prompting manufacturers to continue to expand capacity to meet demand. The pace of job creation remained among the highest seen over the past decade.

“The survey acts as a reliable guide to the official manufacturing data, and suggests that factory output is growing at an annualized rate of around 1.5% so far in the fourth quarter, providing a material but by no means impressive contribution to GDP. As such, the data corroborate the flash PMI’s signal that the economy will likely see growth slow to a 2.5% rate in the fourth quarter.

“In a further sign that growth has peaked, business optimism about the year ahead waned to the lowest for over a year, albeit with the proportion of companies expecting output to be higher in a year’s time outnumbering those expecting a decline by 36% to 3%.”

Services -- “The [combined] surveys paint a picture of an economy growing at a solid annual rate of 2.5% so far in the fourth quarter, and continuing to add jobs in impressive numbers. Although some cooling in the rate of job creation was seen in November, the surveys are still pointing to payrolls growing at monthly rate of around 185,000.

“The surveys therefore add to evidence that the domestic economy remains in good health, generating balanced growth across both manufacturing and services and increasingly outperforming other major economies.

“However, while new business growth remained encouragingly resilient, it has eased to the lowest in over a year as demand showed some signs of softening, linked partly to growing concerns over trade wars, slower global demand growth, rising political uncertainty and tighter financial conditions. Such concerns have also dampened business expectations about the year ahead, adding to signs that growth may have peaked, though any slowing in growth looks likely to be only modest.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2018 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil in November slumped by $13.79 (-19.5%), to $56.96 per barrel. The decrease occurred within the context of a stronger U.S. dollar, the lagged impacts of an 1.35 million barrel-per-day (BPD) drop in the amount of oil supplied/demanded during September (to 20.0 million BPD), and a persistent rise in accumulated oil stocks (monthly average: 443 million barrels). 

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From the 3 December 2018 issue of Peak Oil Review:

With U.S. oil production doubling since 2008, America's economy has received a substantial economic boost with the opening of new export markets for U.S.-produced oil and gas. With the help of the additional boost from the recent tax cut, the U.S. economy has been doing well of late, but there are signs that this may be coming to an end.

For the immediate future, much depends on what the OPEC-Russia coalition decides this week. If they can make real production cuts sufficient to reverse the increase in world crude inventories, and force prices higher, then we could see the oil industry continue to grow. However, it was only four years ago when an oil price slide sent crude down from $110 a barrel to $30. This drop in prices led to a reduction of employment in the U.S. oil industry by more than 160,000 workers, bankrupted hundreds of small drillers, and caused problems for the firms supporting the oil industry.

Even though most expect OPEC to cut output this week, a recent Reuters poll shows oil analysts are increasingly pessimistic about the prospect of a price rally next year, when the outlook for demand is uncertain, and supply is growing rapidly.

When the price of crude oil goes through one of its periodic downturns, as it is doing now, it sends a shiver through the oil industry.  History promises that higher prices will return.  Until then, U.S. shale companies are under severe pressure, and big oil companies wonder about the viability of new projects.  There is more to worry them this time: not just the 29% fall in the price of Brent crude but the fear of this bear market enduring. 

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Selected highlights from the 30 November 2018 issue of OilPrice.com’s Oil & Energy Insider include:

Saudi Arabia struggling to convince others to cut. Many members of the OPEC+ coalition want Saudi Arabia to do all of the heavy lifting when it comes to production cuts. After all, they argue, Saudi Arabia was the one that added 1 million barrels per day of fresh supply since May. The Saudis “made this mess. They need to clean it up,” a Middle Eastern oil official told The Wall Street Journal. On Wednesday, Saudi oil minister Khalid al-Falih indicated that Saudi Arabia would not cut alone. 

Trump administration to advance seismic drilling in Atlantic. The Trump administration is taking an early but critical step that could pave the way to oil exploration in the Atlantic Ocean. According to Bloomberg, the National Marine Fisheries Service could allow seismic surveying by five companies in the Atlantic, a precursor to exploration. Seismic testing is essential to exploration, but is highly controversial because of its effect on marine animals such as whales and dolphins.

Russia shows signs of support for OPEC+ cuts. Russia indicated that it could support an OPEC+ production cut next week in Vienna. Russia’s deputy foreign minister said that Russia wants more predictability and “smooth price dynamics.” However, Russia, and its oil firms, are not scared of lower prices. “Russian crude producers will feel comfortable in the $50 to $60 per barrel band,” said Dmitry Marinchenko, oil and gas director at Fitch Ratings.

Permian natural gas prices fall below zero. Natural gas prices at the Waha hub in the Permian fell into negative territory this week amid a worsening glut. A lack of pipelines to ferry away natural gas has some producers essentially paying other companies to take the product. 

Shale industry could cut spending. The U.S. shale industry could cut budgets for the first time since the last downturn years ago. Shale companies are formulating their 2019 budgets right now, and the latest crash in prices could force a more cautious approach. “Something has to give,” Andy McConn, an analyst at Wood Mackenzie, told Bloomberg. “We expected some minor increases in budgets going into next year but now we see risk to the downside, with budgets flat or down year on year.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2018 Currency Exchange Rates

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In November the monthly average value of the U.S. dollar (USD) appreciated versus Canada’s “loonie” (+1.5%), euro (+1.1%) and yen (+0.5%). On a trade-weighted index basis, the USD gained 1.1% against a basket of 26 currencies. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2018 Construction Spending

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Construction spending during October 2018 was estimated at a seasonally adjusted annual rate (SAAR) of $1,308.8 billion, 0.1% (±1.5%)* below the revised September estimate of $1,310.8 billion (originally $1,329.5 billion); consensus expectations were for +0.4%. The October figure is 4.9% (±1.6%) above the October 2017 SAAR of $1,247.5 billion; the not-seasonally adjusted YoY change (shown in the table below) was +4.5%.

During the first 10 months of this year, construction spending amounted to $1,096.4 billion, 5.1% (±1.2%) above the $1,043.6 billion for the same period in 2017.

* 90% confidence interval includes zero. The U.S. Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 

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Private Construction

Spending on private construction was at a SAAR of $998.7 billion, 0.4% (±0.8%)* below the revised September estimate of $1,003.0 billion.
- Residential: $539.0 billion, 0.5% (±1.3%)* below the revised September estimate of $541.7 billion.
- Nonresidential: $459.7 billion, 0.3% (±0.8%)* below the revised September estimate of $461.3 billion.

Public Construction

Public construction spending was $310.2 billion, 0.8% (±2.6%)* above the revised September estimate of $307.8 billion.
- Educational: $76.9 billion, 2.6% (±2.3%)* above the revised September estimate of $75.0 billion.
- Highway: $94.6 billion, 0.1% (±6.9%)* below the revised September estimate of $94.6 billion. 

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Click here for a discussion of October’s new residential permits, starts and completions. Click here for a discussion of new and existing home sales, inventories and prices.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.