November 2020 Residential Sales, Inventory and Prices

 

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Sales of new single-family houses in November 2020 were at a seasonally adjusted annual rate (SAAR) of 841,000 units (988,000 expected). This is 11.0% (±9.5%) below the revised October rate of 945,000 (originally 999,000 units), but 20.8% (±19.5%) above the November 2019 SAAR of 696,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +18.0%. For longer-term perspectives, NSA sales were 39.5% below the “housing bubble” peak but 12.9% above the long-term, pre-2000 average.

The median sales price of new houses sold in November fell ($2,200 or -0.7% MoM) to $335,300; meanwhile, the average sales price rose to $390,100 ($6,800 or +1.8% MoM). Starter homes (defined here as those priced below $200,000) comprised 5.8% of the total sold, down from the year-earlier 10.0%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 made up 0.7% of those sold in November, down from 2.0% a year earlier.

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As mentioned in our post about housing permits, starts and completions in November, single-unit completions decreased by 5,000 units (-0.6%). Because sales (-104,000 units; -11.0%) fell faster than completions, inventory for sale rose in both absolute (+5,000 units) and months-of-inventory (+0.5 month) terms. 

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Existing home sales declined in November (170,000 units or -2.5%), to a SAAR of 6.69 million units (6.715 million expected). Inventory of existing homes for sale contracted in both absolute (-140,000 units) and months-of-inventory terms (-0.2 month). Because resales fell proportionally more slowly than new-home sales, the share of total sales comprised of new homes dropped to 11.2%. The median price of previously owned homes sold in November retreated to $310,800 ($2,300 or -0.7% MoM).

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Housing affordability deteriorated slightly (-0.2 percentage point) as the median price of existing homes for sale in October rose by $1,700 (+0.5% MoM; +16.0 YoY), to a new high of $317,700. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P Case-Shiller CoreLogic Home Price indices rose at a not-seasonally adjusted monthly change of +1.4% (+8.4% YoY).

“The surprising strength we noted in last month’s report continued into October’s home price data,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “The National Composite Index gained 8.4% relative to its level a year ago, accelerating from September’s 7.0% increase. The 10- and 20-City Composites (up 7.5% and 7.9%, respectively) also rose more rapidly in October than they had done in September. The housing market’s strength was once again broadly-based: all 19 cities for which we have October data rose, and all 19 gained more in the 12 months ended in October than they had gained in the 12 months ended in September.

“We’ve noted before that a trend of accelerating increases in the National Composite Index began in August 2019 but was interrupted in May and June, as COVID-related restrictions produced modestly-decelerating price gains. Since June, our monthly readings have shown accelerating growth in home prices, and October’s results emphatically emphasize that trend. The last time that the National Composite matched this month’s 8.4% growth rate was more than six and a half years ago, in March 2014. Although the full history of the pandemic’s impact on housing prices is yet to be written, the data from the last several months are consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes. We’ll continue to monitor what the data can tell us about this question.

“Phoenix’s 12.7% increase led all cities for the 17^th consecutive month. Seattle (11.7%) and San Diego (11.6%) repeated in second and third place. Prices were strongest in the West and Southwest regions, but even the comparatively weak Midwest and Northeast (up 7.7% and 7.9% respectively) performed creditably well.”

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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.

3Q2020 Gross Domestic Product: Third Estimate

 
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In its third estimate of 3Q2020 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) fine-tuned the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +33.44% (+33.1% expected), up 0.38 percentage point (PP) from the second estimate (“3Qv2”) and +64.83PP from 2Q2020.

As noted in prior 3Q reports, two of the four groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) -- contributed to 3Q growth; net exports (NetX) and government consumption expenditures (GCE) detracted.

The headline number’s uptick reflected mostly insignificant changes to line items, which can be summarized as revisions to consumer spending and business investment that were partly offset by a downward revision to exports. The most noteworthy changes included:

* Personal consumption expenditures contributed +25.44% to the headline number vs +25.22% in 3Qv2

* Fixed investment: +5.39% vs +5.23%

* Inventories: +6.57% vs +6.55%

* Exports: +4.89% vs +4.95%

* Imports: -8.10% vs -8.12%

* Government consumption expenditures: -0.75% vs -0.76%

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“The revisions in this report are statistical noise,” wrote Consumer Metrics Institute’s Rick Davis; “[the BEA is] revising a +33% growth by +0.37PP, a one-percent fine tuning of a number that is an artifact of the BEA's methodology of annualizing quarterly changes. As we have mentioned before, the most meaningful way to report this quarter is on a year-over-year basis.

“Given all of the highly visible economic displacements, by the end of 3Q the YoY contractions -- except for consumer services and foreign trade -- have actually been moderate. The YoY numbers tell us that the lingering household spending changes have been highly focused on consumer services, and those reduced expenditures have been channeled into household savings.

“However official this recession may be, it is not being evenly felt. The YoY numbers confirm the glaringly obvious: the people and businesses battered the most economically have been in ‘non-essential’ services. And, as usual, the businesses (and landlords) with the shallowest pockets will suffer the most. Walmart may feel a twinge even as the corner bar and grill dies,” Davis concluded.

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 2020 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in November were at a seasonally adjusted annual rate of 1,547,000 units (1.530 million expected). This is 1.2% (±8.6%)* above the revised October estimate of 1,528,000 (originally 1.530 million units) and 12.8% (±11.3%) above the November 2019 SAAR of 1,371,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +13.6%.

Single-family housing starts in November were at a SAAR of 1,186,000; this is 0.4% (±7.9%)* above the revised October figure of 1,181,000 units (+29.1% YoY). Multi-family: 361,000 units (+4.0% MoM; -16.1% 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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Total completions were at a SAAR of 1,163,000. This is 12.1% (±5.6%) below the revised October estimate of 1,323,000 (originally 1.343 million units) and 4.8% (±10.6%)* below the November 2019 SAAR of 1,222,000 units; the NSA comparison: -6.0% YoY.

Single-family completions were at a SAAR of 874,000; this is 0.6% (±7.5%)* below the revised October rate of 879,000 units (-5.8% YoY). Multi-family: 289,000 units (-34.9% MoM; -6.6% YoY).

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Total permits amounted to a SAAR of 1,639,000 units (1.550 million expected). This is 6.2% (±1.5%) above the revised October rate of 1,544,000 and 8.5% (±1.8%) above the November 2019 SAAR of 1,510,000 units; the NSA comparison: +8.3% YoY.

Single-family permits were at a SAAR of 1,143,000; this is 1.3% (±0.8%) above the revised October figure of 1,128,000 units (+23.1% YoY). Multi-family: 496,000 units (+19.2% MoM; -12.6% YoY).

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Ending a string of three successive months of record highs, builder confidence in the market for newly built single-family homes fell four points to 86 in December, according to the latest NAHB/Wells Fargo Housing Market Index. Despite the decline, this is still the second-highest reading in the history of the series after last month’s mark of 90.

“Housing demand is strong entering 2021, however the coming year will see housing affordability challenges as inventory remains low and construction costs are rising,” said NAHB Chairman Chuck Fowke. “Policymakers should take note to avoid increasing regulatory costs associated with land development and residential construction.”

“Builder confidence fell back from historic levels in December, as housing remains a bright spot for a recovering economy,” said NAHB Chief Economist Robert Dietz. “The issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs. As the economy improves with the deployment of a COVID-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes.”

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 2020 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.4% in November (+0.3% expected). After having fallen 16.5% between February and April, the level of the index has risen to about 5% below its pre-pandemic (February) reading. In November, manufacturing output advanced 0.8% for its seventh consecutive monthly gain. An increase of 5.3% for motor vehicles and parts contributed significantly to the gain in factory production; excluding motor vehicles and parts, manufacturing output moved up 0.4%. The output of utilities declined 4.3%, as warmer-than-usual temperatures reduced the demand for heating. Mining production increased 2.3% after decreasing 0.7% in October. At 104.0% of its 2012 average, total industrial production was 5.5% lower in November than it was a year earlier.

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Industry Groups

Manufacturing output increased 0.8% in November to a level that was 3.8% below its pre-pandemic reading (NAICS manufacturing: +0.8% MoM; -3.5% YoY). The index for durable manufacturing rose 1.5% with widespread gains across its components. In addition to the large increase for motor vehicles and parts, output moved up notably for primary metals, for computers and electronics, for aerospace and miscellaneous transportation equipment, and for miscellaneous manufacturing (wood products: +0.3%). The index for nondurables edged up 0.1% in November after posting an increase of 1.4% in October. In November, increases in the indexes for food, beverage, and tobacco products and for paper products (+2.0%) more than offset declines elsewhere. The output of other manufacturing (publishing and logging) fell 1.2%.

The index for utilities dropped 4.3% in November, with declines for both electric and natural gas utilities. Mining production rose 2.3%; all of its major components posted gains of more than 1-1/2%.

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Capacity utilization (CU) for the industrial sector increased 0.3 percentage point (PP) in November, to 73.3%, a rate that is 6.5PP below its long-run (1972–2019) average but 9.1PP above its low in April.

Manufacturing CU moved up 0.6PP in November to 72.6%, 12.5PP higher than its trough in April but still 5.6PP below its long-run average (NAICS manufacturing: +0.8% MoM, to 73.1%; wood products: +0.3% MoM; paper products: +2.1% MoM). The utilization rate for mining increased to 79.4%; it remained well below its long-run average of 87.2%. The operating rate for utilities declined to 70.2%, a rate that is 15.0PP below its long-run average.

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Capacity at the all-industries level was essentially unchanged MoM (+0.0 % YoY) at 141.8% of 2012 output. Manufacturing (NAICS basis) was also unchanged (-0.1% YoY) at 140.0%. Wood products: 0.0% (+0.7% YoY) at 169.8%; paper products: -0.1% (-0.8 % YoY) to 108.9%.

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 2020 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) increased 0.2% in November (0.1% expected). The increase was broad-based, with no component accounting for more than a quarter of the increase. The food index declined in November, as a decrease in the food at home index more than offset a small increase in the food away from home index. The index for energy rose in November, as increases in indexes for natural gas and electricity more than offset a decline in the index for gasoline.

The index for all items less food and energy increased 0.2% in November after being unchanged the prior month. The indexes for lodging away from home, household furnishings and operations, recreation, apparel, airline fares, and motor vehicle insurance all increased in November. The indexes for used cars and trucks, medical care, and new vehicles all declined over the month.

The all-items index rose 1.2% for the 12 months ending November, the same increase as for the period ending October. The index for all items less food and energy rose 1.6% over the last 12 months, also the same increase as the period ending October. The food index rose 3.7% over the last 12 months, while the energy index fell 9.4%.

 

Producer Price Index

The Producer Price Index for final demand (PPI-FD) advanced 0.1% in November (+0.1% expected). Final demand prices rose 0.3% in October and 0.4% in September. The rise can be traced to a 0.4% increase in prices for final demand goods. The index for final demand services was unchanged.

On an unadjusted basis, the final demand index increased 0.8% for the 12 months ended in November, the largest advance since moving up 1.1% for the 12 months ended in February. The index for final demand less foods, energy, and trade services advanced 0.1% in November, the seventh consecutive increase. For the 12 months ended in November, prices for final demand less foods, energy, and trade services moved up 0.9%, the largest rise since a 1.0% increase for the 12 months ended in March.

Final Demand

Final demand goods: The index for final demand goods rose 0.4% in November, the seventh consecutive advance. Nearly half of the broad-based November increase can be traced to prices for final demand energy, which moved up 1.2%. The indexes for final demand goods less foods and energy and for final demand foods rose 0.2% and 0.5%, respectively.

Product detail: In November, a major factor in the increase in prices for final demand goods was the index for diesel fuel, which advanced 8.4%. Prices for meats, processed young chickens, residential electric power, residential natural gas, and tobacco products also moved higher. In contrast, the gasoline index fell 1.9%. Prices for fresh fruits and melons and for pharmaceutical preparations also decreased.

Final demand services: The index for final demand services was unchanged in November after advancing 0.2% in October. In November, prices for final demand services less trade, transportation, and warehousing climbed 0.2%. Conversely, the indexes for final demand trade services and for final demand transportation and warehousing services decreased 0.3% and 0.9%, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: In November, prices for outpatient care (partial) increased 0.4%. The indexes for apparel, jewelry, footwear, and accessories retailing; machinery and equipment parts and supplies wholesaling; truck transportation of freight; and chemicals and allied products wholesaling also moved higher. In contrast, margins for machinery and vehicle wholesaling fell 7.6%. The indexes for transportation of passengers (partial); fuels and lubricants retailing; hardware, building materials, and supplies retailing; and securities brokerage, dealing, and investment advice also decreased.

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The not-seasonally adjusted price indexes we track were mixed on both MoM and YoY bases.

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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 2020 International Trade (Softwood Lumber)

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Softwood lumber exports rose (13 MMBF or +15.0%) in October, along with imports (29 MMBF or +2.1%). Exports were 12 MMBF (-11.0%) below year-earlier levels; imports were 230 MMBF (+18.7%) higher. As a result, the year-over-year (YoY) net export deficit was 242 MMBF (+21.6%) larger. Also, the average net export deficit for the 12 months ending October 2020 was 3.1% larger 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 (48.3%; of which Canada: 21.6%; Mexico: 26.6%), Asia (18.3%; especially China: 4.9%; and Japan: 5.4%), and the Caribbean: 26.7% (especially the Dominican Republic: 10.8%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -13.2% relative to the same months in 2019. Meanwhile, Canada was the source of most (85.7%) of softwood lumber imports into the United States. Imports from Canada were 2.8% lower YTD than the same months in 2019. Overall, YTD exports were down 17.1% compared to 2019; imports: +1.1%.

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U.S. softwood lumber export activity through the West Coast customs region represented the largest proportion (34.6% of the U.S. total), followed by the Gulf (33.3%) and Eastern (23.9%) regions. Mobile (21.6% of the U.S. total) was the single most-active district, followed by Seattle (17.8%) and San Diego (14.9%). At the same time, Great Lakes customs region handled 56.7% of softwood lumber imports -- most notably the Duluth, MN district (23.5%) -- coming into the United States. 

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Southern yellow pine comprised 27.7% of all softwood lumber exports; Douglas-fir (15.1%) and treated lumber (16.2%) were also significant. Southern pine exports were down 13.5% YTD relative to 2019, while Doug-fir: -13.7%; treated: -6.5%.

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 2020 Currency Exchange Rates

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In November the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-1.1%), the euro (-0.5%), and the Japanese yen (-0.8%). On the broad trade-weighted index basis (goods and services), the USD weakened by 1.5% 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 2020 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 increased $4.9 billion or 1.0% to $488.6 billion. Durable goods shipments increased $3.2 billion or 1.3% to $248.8 billion, led by fabricated metal products. Meanwhile, nondurable goods shipments increased $1.7 billion or 0.7% to $239.8 billion, led by chemical products. Shipments of wood products rose by 1.4%; paper: +1.6%.

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Inventories increased $1.2 billion or 0.2% to $687.3 billion. The inventories-to-shipments ratio was 1.41, down from 1.42 in September. Inventories of durable goods increased $1.0 billion or 0.2% to $422.5 billion, led by transportation equipment. Nondurable goods inventories increased $0.1 billion or 0.1% to $264.8 billion, led by chemical products. Inventories of wood products rose by 1.9%; paper: -0.1.

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New orders increased $4.9 billion or 1.0% to $480.8 billion. Excluding transportation, new orders rose by $3.8 billion or 1.0% (-2.6% YoY). Durable goods orders increased $3.2 billion or 1.3% to $241.0 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $0.6 billion or 0.8% (+5.6% YoY). New orders for nondurable goods increased $1.7 billion or 0.7% to $239.8 billion.

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Unfilled durable-goods orders decreased $2.6 billion or 0.2% to $1,073.3 billion, led by transportation equipment. The unfilled orders-to-shipments ratio was 6.38, down from 6.57 in September. Real unfilled orders, which had been a good litmus test for sector growth, show a less positive 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. Since then, however, real unfilled orders have been trending lower.

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 2020 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added 245,000 jobs in November (less than half of the 500,000 expected). Also, September and October employment changes were revised up by a combined 11,000 (September: +39,000; October: -28,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) fell (-0.2 percentage point) to 6.7% as shrinkage in the labor force (-400,000) overwhelmed the decline in the number of employed persons (-74,000).

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Observations from the employment reports include:

* Changes in the establishment (+245,000 jobs) and household surveys (-74,000 employed) were not well correlated. 

* Goods-producing industries gained a mere 55,000 jobs, while service-providing employment added a somewhat more robust 190,000 jobs -- especially transportation and warehousing (+145,000), professional and business services (+60,000), and health care (+46,000). Employment in government declined (-86,000), driven by a loss of 93,000 temporary 2020 Census workers. Manufacturing expanded by 27,000 jobs. That result conflicts with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which contracted in November. Wood Products employment ticked up by 500 (ISM increased); Paper and Paper Products: +600 (ISM decreased); Construction: +27,000 (ISM increased).

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* The number of employment-age persons not in the labor force rose (560,000) to 100.6 million. As a result, the employment-population ratio (EPR) slipped to 57.3%; i.e., nearly six in 10 of the employment-age population is presently employed. 

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* Because the civilian labor force shrank by 400,000 in November, the labor force participation rate retreated (-0.2 PP) to 61.5%. Average hourly earnings of all private employees gained $0.09 to $29.58, resulting in a 4.4% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.07, to $24.87 (+4.5% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.8 hours, average weekly earnings increased by $3.13, to $1,029.38 (+8.0% YoY). With the consumer price index running at an annual rate of +1.2% in October, whether consumers are keeping up with price inflation depends primarily upon whether or not they are working.

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* Full-time jobs rose (+752,000) to 124.3 million. Workers employed part time for economic reasons (shown in the graph above) -- e.g., slack work or business conditions, or could find only part-time work -- slid by 23,000, whereas those working part time for non-economic reasons dropped by 786,000; multiple-job holders retreated by 103,000. 

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For a “sanity test” 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 in November rose by $8.3 billion, to $194.7 billion (+4.3% MoM; -2.9% YoY). To reduce some of the monthly 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 3.2% below the year-earlier average. As we have previously mentioned, President Trump’s executive order deferring certain payroll obligations through December 31, 2020 complicates comparisons with earlier data.

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 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed U.S. manufacturing expanding more slowly during November. The PMI registered 57.5%, down 1.8 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. The sub-indexes reflected that deceleration, including new orders (-2.8PP), production (-2.2PP), employment (-4.8PP, dropping into contraction).

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The services sector -- which accounts for 80% of the economy and 90% of employment -- also expanded at a marginally slower rate (-0.7PP, to 55.9%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included a drop in inventories (-3.8PP) and order backlogs (-3.7PP), and a jump in input prices (+2.2PP).

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Of the industries we track, only Real Estate contracted. Comments from respondents included:

Construction. “Business is pushing to complete projects due to seasonality in most of our markets. Volume is strong at this point but will gradually slow as temperatures drop in most of the country.”

 

Relevant commodities:

Priced higher. Corrugate and corrugate boxes, freight, lumber and lumber products, natural gas, plywood products, and construction contractors.

Priced lower. Diesel and caustic soda.

Prices mixed. None.

In short supply. Corrugate boxes, construction contractors and subcontractors, and temporary labor.

 

Findings of IHS Markit‘s November survey results were again more positive than their ISM counterparts.

Manufacturing. Steepest improvement in operating conditions since September 2014.

Key findings:

* Overall growth boosted by marked expansions in output and new orders
* Fastest rise in cost burdens since October 2018
* Business confidence strongest since February 2015

 

Services. Sharpest increase in activity since March 2015.

Key findings:

* Substantial upturns in output and new business
* Employment rises at fastest pace in survey history
* Price indices at survey highs as cost pressures intensify

 

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

Manufacturing. “The manufacturing recovery kicked up a gear in November, with production growth accelerating to the highest for over six years.

“Most encouraging was the breakdown of the rise in new orders which underpinned the expansion. Although demand for consumer goods remained somewhat subdued, mainly reflecting rising virus infection rates, demand for investment goods such as business equipment and machinery rose especially sharply.

“The rise in investment spending sends a welcome signal that companies have become more optimistic about longer term prospects, something that was reinforced by a surge in firms’ expectations about production in the year ahead -- even in consumer-facing sectors -- to the highest since early-2015.

“Confidence was boosted by encouraging vaccine news during the month, auguring well for life returning to normal at some point in the coming year, as well as hopes of increased stimulus spending and infrastructure investment following the election.”

 

Services. “November saw U.S. business activity surge higher at a rate not seen since early 2015 as companies enjoyed sharply rising demand for goods and services. Confidence has picked up considerably, with encouraging news on vaccines coinciding with reduced political uncertainty following the presidential election, hopes of greater stimulus spending and fresh stock market highs. Optimism about the future is running at its highest since early-2014.

“The recent improvement in demand and the brightening outlook encouraged firms to take on extra staff at a rate not previously seen since the survey began in 2009, underscoring how increased optimism is fueling investment and expansion.

“Pricing power is also being regained, with firms pushing up average charges for goods and services at a rate not seen for at least a decade, boding well for stronger profits growth.”

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 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil ticked up by $1.54 (+3.9%), to $40.94 per barrel in November. That increase occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 132,000 barrel-per-day (b/d) decrease in the amount of petroleum products demanded/supplied during September (to 18.3 million b/d, on par with volumes during/after the Great Recession), and little change in accumulated oil stocks (November average: 489 million barrels) -- continuing below the maximum of the five-year average range.

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From the 30 November 2020 issue of The Energy Bulletin:

Prices rose for a fourth straight week, buoyed by optimism over Covid-19 vaccine progress ahead of an OPEC+ ministerial meeting this week. Futures in New York advanced 8 percent last week, despite edging lower on Friday. The shape of the oil futures curve firmed over recent sessions, with some nearer-dated futures contracts rising above later-dated ones. It's a sign of how the market has dramatically repriced the increased likelihood of a vaccine rollout jumpstarting more robust demand next year.

OPEC: Formal ministerial meetings were scheduled for Monday and Tuesday this week [postponed to Thursday] when producers decide whether to postpone the planned output hike. OPEC and its Russia-led partners are leaning toward extending oil production cuts for another two to three months, a move they hope will keep markets tight as prices start to recover. Officials said a deal isn't done yet, and issues related to several countries' past compliance could still prevent an agreement when the group meets this week.

World oil prices are now near $50 a barrel, up 25 percent this month and Chinese and Asian demand has recovered as Covid-19 eases there. Promising results for several Western vaccines have lifted stock markets and crude prices. Taken together, these developments argue for increasing production. Some OPEC members like the UAE, Iraq, and Nigeria have expressed misgivings over maintaining the status quo.

Prognosis: [The] meeting of OPEC and its partners, at which the alliance will decide on production levels from January, will determine the market's direction in the short term. Over the longer haul, uncertainties remain. Covid-19 vaccines could boost global economic prospects and bolster demand for oil in 2021 if there is widespread distribution of the shots. However, the current coronavirus cases in both the U.S. and Europe could prompt new travel and business restrictions, weighing on demand.

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Selected highlights from the 1 December 2020 issue of OilPrice.com’s Intelligence Report include:

OPEC+ delays meeting as talks continue. OPEC+ postponed a decision on its next steps until Thursday after talks proved trickier than expected. Analysts expected the group to extend its current agreement by three months or so, rather than allowing the cuts to taper beginning in January. However, Reuters reports that some members are itching to increase production. Russia has suggested easing by 0.5 mb/d each month beginning in January. At the same time, the UAE is uncomfortable with low compliance levels of other members.

Exxon takes historic $20 billion writedown. ExxonMobil (NYSE: XOM) said that it would write down as much as $17 to $20 billion in the fourth quarter, the largest writedown in modern history. The impairment was concentrated in natural gas assets across a wide geographic area: Appalachia, Rocky Mountains, Oklahoma, Texas, Louisiana, along with Western Canada and Argentina. The move dates back to a major blunder when Exxon purchased XTO Energy for $35 billion in 2010, an acquisition widely seen as a costly mistake.

U.S. shale is broken. After many ups and downs, most analysts see U.S. shale production remaining flat for years, handing leverage back to OPEC+. "I see no more growth until 2022, 2023, and it will be very, very light in regard to the U.S. shale industry ever-growing again," said Pioneer (NYSE: PXD) CEO Scott Sheffield.

Shale drillers shift to gas. Higher natural gas prices and subdued crude prices have drillers shifting towards gas, a turnaround from much of the past decade. EOG Resources (NYSE: EOG) and Continental Resources (NYSE: CLR) have both increased their focus on gas, for example.

Oil markets face a 200-million-barrel glut in 2021. Rystad Energy's balances show that should OPEC+ fail to amend its existing deal and increase its production, the world in January will face its biggest monthly glut since April 2020 with an average daily surplus of 3.1 million barrels for the month.

Bank of America rules out Arctic financing. Bank of America joined other major banks in ruling out funding for new oil and gas drilling in the Arctic. Goldman Sachs, Morgan Stanley, Wells Fargo, and Citi have all previously done the same.

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.