February 2021 Residential Sales, Inventory and Prices

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Sales of new single-family houses in February 2021 were at a seasonally adjusted annual rate (SAAR) of 775,000 units (875,000 expected). This is 18.2% (±13.9%) below the revised January rate of 948,000 (originally 923,000 units), but 8.2% (±21.7%)* above the February 2020 SAAR of 716,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +1.6%. For longer-term perspectives, NSA sales were 44.2% below the “housing bubble” peak but 22.4% above the long-term, pre-2000 average.

The median sales price of new houses sold in February fell ($3,800 or -1.1% MoM) to $349,400; meanwhile, the average sales price rose to $416,000 ($5,600 or +1.4% MoM). Starter homes (defined here as those priced below $200,000) comprised 3.8% of the total sold, down from the year-earlier 11.1%; prior to the Great Recession starter homes represented as much as 61% of total new-home sales. Homes priced below $150,000 were less than 1% of sales, down from 1.1% a year earlier.

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

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As mentioned in our post about housing permits, starts and completions in February, single-unit completions increased by 28,000 units (+2.8%). Because sales (-173,000 units; -18.2%) fell while completions rose, inventory for sale expanded in both absolute (+8,000 units) and months-of-inventory (+1.0 month) terms. 

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Existing home sales slumped in February (440,000 units or -6.6%), to a SAAR of 6.22 million units (6.500 million expected). Inventory of existing homes for sale was unchanged in absolute terms but nudged higher (0.1 month) in months-of-inventory terms. Because resales fell proportionally more slowly than new-home sales, the share of total sales comprised of new homes retreated to 11.1%. The median price of previously owned homes sold in February advanced to $313,000 ($9,400 or +3.1% MoM).

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Housing affordability jumped by +15.4 percentage points as the median price of existing homes for sale in January fell by $5,400 (-1.7% MoM; +14.8 YoY), to $308,300. 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 +0.8% (+11.2% YoY).

“The strong price gains that we observed in the last half of 2020 continued into the first month of the new year. In January 2021, the National Composite Index rose by 11.2% compared to its year-ago levels,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The trend of accelerating prices that began in June 2020 has now reached its eighth month and is also reflected in the 10- and 20-City Composites (up 10.9% and 11.1%, respectively). The market’s strength is broadly-based: all 20 cities rose, and all 20 cities gained more in the 12 months ended in January 2021 than they had gained in the 12 months ended in December 2020.

“January’s performance is particularly impressive in historical context. The National Composite’s 11.2% gain is the highest recorded since February 2006, just one month shy of 15 years ago. In more than 30 years of S&P CoreLogic Case-Shiller data, January’s year-over-year change is comfortably in the top decile. That strength is reflected across all 20 cities. January’s price gains in every city are above that city’s median level, and rank in the top quartile of all reports in 18 cities.

“January’s data remain consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes. This demand may represent buyers who accelerated purchases that would have happened anyway over the next several years. Alternatively, there may have been a secular change in preferences, leading to a shift in the demand curve for housing. Future data will be required to analyze this question.

“Phoenix’s 15.8% increase led all cities for the 20th consecutive month, with Seattle (+14.3%) and San Diego (+14.2%) close behind. Although prices were strongest in the West (+11.7%), gains were impressive in every region.”

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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.

4Q2020 Gross Domestic Product: Third Estimate

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In its third estimate of 4Q2020 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 +4.32% (+4.1% expected), up 0.22 percentage point (PP) from the second estimate (“4Qv2”) but -29.12PP from 3Q2020.

As noted in prior 4Q reports, two of the four groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) -- contributed to 4Q growth; net exports (NetX) and government consumption expenditures (GCE) detracted.

The headline number’s uptick was dominated by an expansion of private inventories. Changes among most other line items were insignificant. As for details (all relative to 4Qv2):

* PCE. Consumer spending on goods was revised lower (-$6.5 billion, nominal dollars). Spending on services was left nearly unchanged (+$1.1B), as revisions to health care (+$10.5B) and financial services and insurance (+$9.7B) were essentially offset by the imputed value of services provided by nonprofit institutions (-$22.4B).

* PDI. Revisions to private inventories (+$14.0B) and intellectual property products (+$5.0B) were partially offset by a decline in nonresidential structures (-$10.3B).

* NetX. The change to exports (+$2.1B) more than outweighed the change to imports (+$1.7B). Recall that an increase in imports reduces the headline number.

* GCE. A revision of +$2.6B in gross investment among state and local governments accounted for essentially all of the improvement in this category.

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According to Consumer Metrics Institute’s Rick Davis, the key points of this report can be summarized as follows:

-- Consumer spending on goods continues to contract, while spending on services continues a slow recovery from the horrendous 2Q2020 numbers. Household savings rates indicate that consumers remained wary during 4Q.

-- The positive headline is provided by growth in commercial fixed investments and inventories.

“Under normal economic circumstances a report like this would be cause for -- if not celebration -- at least some smug sense of contentment,” Davis concluded. “However, these are times of significant economic displacements, and normalcy is at least a few quarters away.”

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.

February 2021 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in February at a seasonally adjusted annual rate (SAAR) of 1,421,000 units (1.579 million expected). This is 10.3% (±10.5%)* below the revised January estimate of 1,584,000 (originally 1.580 million units) and 9.3% (±9.4%)* below the February 2020 SAAR of 1,567,000 units; the not-seasonally adjusted YoY change (shown in the table above) was -9.8%.

Single-family housing starts in February were at a SAAR of 1,040,000; this is 8.5% (±9.3%)* below the revised January figure of 1,136,000 units (-1.1% YoY). Multi-family: 381,000 units (-15.0% MoM; -26.2% 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 1,362,000. This is 2.9% (±10.0%)* above the revised January estimate of 1,324,000 (originally 1.336 million units) and 5.0% (±11.9%)* above the February 2020 SAAR of 1,297,000 units; the NSA comparison: +5.3% YoY.

Single-family completions were at a SAAR of 1,042,000; this is 2.8% (±10.5%)* above the revised January rate of 1,014,000 units (+4.7% YoY). Multi-family: 320,000 units (+3.2% MoM; +7.5% YoY).

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Total permits amounted to a SAAR of 1,682,000 units (1.725 million expected). This is 10.8% (±1.0%) below the revised January rate of 1,886,000 (originally 1.881 million units), but 17.0% (±1.4%) above the February 2020 SAAR of 1,438,000 units; the NSA comparison: +17.0% YoY.

Single-family permits were at a rate of 1,143,000; this is 10.0% (±0.8%) below the revised January figure of 1,270,000 units (+14.3% YoY). Multi-family: 539,000 units (-12.5% MoM; +23.5% YoY).

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Despite high buyer traffic and strong demand, builder sentiment fell in March as rising lumber and other material prices pushed builder confidence lower. The latest NAHB/Wells Fargo Housing Market Index (HMI) showed that builder confidence in the market for newly built single-family homes fell two points to 82 in March.

“Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month,” said NAHB Chairman Chuck Fowke. “Supply shortages and high demand have caused lumber prices to jump more than 200% since last April. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”

“Builder confidence peaked at a level of 90 last November and has trended lower as supply-side and demand-side factors have trimmed housing affordability,” said NAHB Chief Economist Robert Dietz. “While single-family home building should grow this year, the elevated price of lumber is adding approximately $24,000 to the price of a new home. And mortgage interest rates, while historically low, have increased about 30 basis points over the last month. Nonetheless, the lack of resale inventory means new construction is the only option for some prospective home buyers.”

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.

February 2021 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) decreased 2.2% in February (+0.5% expected). Manufacturing output and mining production fell 3.1% and 5.4%, respectively; the output of utilities increased 7.4%.

The severe winter weather in the south central region of the country in mid-February accounted for the bulk of the declines in output for the month. Most notably, some petroleum refineries, petrochemical facilities, and plastic resin plants suffered damage from the deep freeze and were offline for the rest of the month. Excluding the effects of the winter weather would have resulted in an index for manufacturing that fell about 1/2% and in an index for mining that rose about 1/2%. Both indexes would have remained below their pre-pandemic (February 2020) levels.

At 104.7% of its 2012 average, total IP in February was 4.2% lower than its year-earlier level. 

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Industry Groups

Manufacturing output decreased 3.1% in February (NAICS manufacturing: -3.1% MoM; -3.8% YoY). The indexes for durable, nondurable, and other (publishing and logging) manufacturing fell 2.6%, 3.7%, and 0.5%, respectively. Among durables, many industries experienced decreases of between 1 and 3% (wood products: -1.1%). The largest drop, 8.3%, was posted by motor vehicles and parts, while the only increases were recorded by primary metals and by aerospace and miscellaneous transportation equipment. The cutback in the output of motor vehicles and parts, which reflected both a global shortage of semiconductors and the severe weather, reduced overall manufacturing output about 1/2%. Among nondurables, most industries recorded losses (paper: -0.1%). The largest reductions occurred in those industries most affected by the weather: The indexes for chemicals and for petroleum and coal products decreased 7.1% and 4.4%, respectively.

The output of utilities increased 7.4% in February, as the extremely cold winter weather boosted demand for heating. Mining production decreased 5.4%; a drop of more than 6% for oil and natural gas extraction accounted for most of the loss. The index for oil and gas well drilling continued its climb with an advance of 6.4%, though it remained about 50% below its year-earlier level.

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Capacity utilization (CU) for the industrial sector decreased 1.7 percentage points (PP) in February to 73.8%, a rate that is 5.8PP below its long-run (1972–2020) average.

Manufacturing CU decreased 2.3PP in February to 72.3% (NAICS manufacturing: -3.1% MoM, to 72.9%; wood products: -1.1%; paper products: -0.1%). The operating rate for mining decreased 4.3PP to 77.5%, while the operating rate for utilities increased 5.2PP to 78.5%; both rates remained below their long-run averages.

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Capacity at the all-industries level was essentially unchanged MoM (-0.1 % YoY) at 141.9% of 2012 output. Manufacturing (NAICS basis) was also unchanged (-0.2% YoY) at 140.0%. Wood products: less than +0.1% (+0.4% YoY) to 170.0%; paper products: 0.0% (-0.6% YoY) at 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.

February 2021 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 0.4% in February (+0.4% expected) after rising 0.3% in January. The gasoline index continued to increase, rising 6.4% in February and accounting for over half of the seasonally adjusted increase in the all-items index. The electricity and natural gas indexes also increased, and the energy index rose 3.9% over the month. The food index rose 0.2% in February, with the index for food at home and the index for food away from home both rising.

The index for all items less food and energy rose 0.1% in February. The indexes for shelter, recreation, medical care, and motor vehicle insurance all increased over the month. The indexes for airline fares, used cars and trucks, and apparel all declined in February.

The all-items index rose 1.7% for the 12 months ending February, a larger increase than the 1.4% reported for the period ending in January. The index for all items less food and energy rose 1.3% over the last 12 months, a smaller increase than the 1.4% rise for the 12 months ending January. The food index rose 3.6% over the last 12 months, while the energy index increased 2.4% over that period.

Producer Price Index

The producer price index for final demand (PPI-FD) increased 0.5% in February (in line with expectations). This rise followed advances of 1.3% in January and 0.3% in December. Most of the February advance can be traced to a 1.4% rise in the index for final demand goods. Prices for final demand services increased 0.1%.

On an unadjusted basis, the final demand index moved up 2.8% for the 12 months ended in February, the largest increase since rising 3.1% for the 12 months ended October 2018. Prices for final demand less foods, energy, and trade services moved up 0.2% in February, the tenth consecutive advance. For the 12 months ended in February, the index for final demand less foods, energy, and trade services rose 2.2%, the largest increase since a 2.4% advance for the 12 months ended May 2019.

Final Demand

Final demand goods: The index for final demand goods rose 1.4% in February, the same as in January. Over two-thirds of the broad-based February increase can be traced to prices for final demand energy, which climbed 6.0%. The indexes for final demand goods less foods and energy and for final demand foods advanced 0.3% and 1.3%, respectively.

Product detail: Forty percent of the February increase in the index for final demand goods is attributable to gasoline prices, which jumped 13.1%. The indexes for diesel fuel, beef and veal, basic organic chemicals, residential electric power, and chicken eggs also moved higher. Conversely, prices for fresh and dry vegetables fell 16.7%. The indexes for iron and steel scrap and for distilled and bottled liquor (except brandy) also declined.

Final demand services: The index for final demand services inched up 0.1% in February after increasing 1.3% in January. Two-thirds of the February advance in prices for final demand services can be traced to a 1.1% rise in the index for final demand transportation and warehousing services. Margins for final demand trade services edged up 0.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) The index for final demand services less trade, transportation, and warehousing was unchanged.

Product detail: A 3.6% increase in the index for transportation of passengers (partial) was a major factor in the February advance in prices for final demand services. The indexes for securities brokerage, dealing, and investment advice; machinery and equipment parts and supplies wholesaling; health, beauty, and optical goods retailing; and hardware, building materials, and supplies retailing also moved higher. In contrast, margins for apparel, jewelry, footwear, and accessories retailing decreased 6.5%. The indexes for traveler accommodation services, machinery and vehicle wholesaling, and portfolio management also declined.

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The not-seasonally adjusted price indexes we track all rose 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.

January 2021 International Trade (Softwood Lumber)

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Softwood lumber exports rose (<1 MMBF or +0.1%) in January, but imports fell (113 MMBF or -8.0%). Exports were 13 MMBF (-12.5%) below year-earlier levels; imports were 271 MMBF (+26.3%) higher. As a result, the year-over-year (YoY) net export deficit was 284 MMBF (+30.8%) larger. Also, the average net export deficit for the 12 months ending January 2021 was 8.6% 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 (49.9%; of which Canada: 29.1%; Mexico: 20.8%), Asia (21.3%; especially China: 6.1%; and Japan: 5.6%), and the Caribbean: 21.8% (especially the Dominican Republic: 9.4%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -30.4% relative to the same months in 2020. Meanwhile, Canada was the source of most (86.0%) of softwood lumber imports into the United States. Imports from Canada were 26.3% higher YTD than the same months in 2019. Overall, YTD exports were down 12.5% compared to 2019; imports: +26.3%.

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U.S. softwood lumber export activity through the West Coast customs region represented 35.8% of the U.S. total; Gulf: 25.4%, and Eastern: 28.1%. Seattle (21.2% of the U.S. total) was the single most-active district, followed by Mobile (17.0%) and San Diego (12.5%). At the same time, Great Lakes customs region handled 57.5% of softwood lumber imports -- most notably the Duluth, MN district (22.9%) -- coming into the United States. 

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Southern yellow pine comprised 23.9% of all softwood lumber exports; Douglas-fir (16.4%) and treated lumber (14.2%) were also significant. Southern pine exports were down 22.4% YTD relative to 2020, while Doug-fir: -12.4%; and treated: -23.4%.

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.

February 2021 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added 379,000 jobs in February (handily beating consensus expectations of +140,000). December and January employment changes were revised up by a combined 38,000 (December: -79,000: January: +117,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down by 0.1 percentage point (to 6.2%) the ranks of the employed swelled much faster (+208,000) than the civilian labor force (+50,000). 

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Observations from the employment reports include:

* The establishment (+379,000 jobs) and household surveys (+208,000 employed) were reasonably well correlated. 

* Goods-producing industries gave up 48,000 jobs, while service-providing employment added 427,000 positions. Most of the job gains occurred in leisure and hospitality (+355,000 or 94% of net jobs added) -- of which 285,900 were in food services and drinking places -- with smaller gains in temporary help services (+52,700), health care and social assistance (+45,600), and retail trade (+41,000). Employment declined in state and local government education (-68,600), and support activities for mining (-6,200). Manufacturing expanded by 21,000 jobs. That result is consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which rose faster in February. Wood Products employment ticked down by 1,100 (ISM was unchanged); Paper and Paper Products: -1,000 (ISM declined); Construction: -61,000 (ISM increased).

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* The number of employment-age persons not in the labor force edged up (18,000) to 100.7 million. However, the employment-population ratio (EPR) ticked up to 57.6%; i.e., nearly six in 10 of the employment-age population are presently employed. 

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* Because the civilian labor force expanded by a meager 50,000 in February, the labor force participation rate was unchanged at 61.4%. Meanwhile, average hourly earnings of all private employees rose by $0.07 to $30.01, resulting in a 5.3% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages rose by $0.04, to $25.19 (+5.1% YoY). Since the average workweek for all employees on private nonfarm payrolls contracted by 0.3 hour, average weekly earnings decreased by $6.56, to $1,038.35 (+4.2% YoY). With the consumer price index running at an annual rate of +1.4% in January, whether consumers are keeping up with price inflation depends primarily upon whether or not they are working.

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* Full-time jobs fell (-122,000) to 124.9 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 -- rose by 134,000, whereas those working part time for non-economic reasons retreated by 150,000; multiple-job holders advanced by 55,000.

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For a “sanity test” of the job numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld in February edged up by $6.1 billion, to $231.4 billion (+2.7% MoM; +3.8% 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 February was 0.7% above the year-earlier average.

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.

January 2021 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 January increased $9.6 billion or 1.9% to $513.3 billion. Durable goods shipments increased $4.9 billion or 1.9% to $260.6 billion, led by machinery. Meanwhile, nondurable goods shipments increased $4.7 billion or 1.9% to $252.7 billion, led by petroleum and coal products. Shipments of wood products rose by 5.8%; paper: +1.9%.

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Inventories increased $0.6 billion or 0.1% to $696.3 billion. The inventories-to-shipments ratio was 1.36, down from 1.38 in December. Inventories of durable goods decreased $1.4 billion or 0.3% to $424.3 billion, led by transportation equipment. Nondurable goods inventories increased $2.0 billion or 0.7% to $272.0 billion, led by petroleum and coal products. Inventories of wood products rose by 0.5%; paper: +0.3%.

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New orders increased $13.1 billion or 2.6% to $509.4 billion. Excluding transportation, new orders rose by $6.9 billion or 1.7% (+1.5% YoY). Durable goods orders increased $8.4 billion or 3.4% to $256.7 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $0.3 billion or 0.4% (+8.3% YoY). New orders for nondurable goods increased $4.7 billion or 1.9% to $252.7 billion.

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Unfilled durable-goods orders increased $1.2 billion or 0.1% to $1,072.8 billion, led by fabricated metal products. The unfilled orders-to-shipments ratio was 6.28, down from 6.40 in November. Real unfilled orders, which had been a good litmus test for sector growth, show an even more-negative 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.

February 2021 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $7.04 (+13.5%), to $59.05 per barrel in February. That increase occurred within the context of a modestly stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 94,000 barrel-per-day (BPD) increase in the amount of petroleum products demanded/supplied during December (to 18.8 million BPD, on par with volumes during/after the Great Recession), and a late-February jump in accumulated oil stocks (February average: 470 million barrels).

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From the 1 March 2021 issue of The Energy Bulletin:

US crude futures were up nearly 22% in February with expectations of shrinking supplies and a further rebound in consumption as economies worldwide begin to reopen. However, the market is facing a possible supply increase in April from OPEC+ and variants of Covid-19 continue to spread.

Shale producers reported almost 6 million barrels of combined oil-output losses during the freeze the week before last. According to Bloomberg News calculations, Occidental Petroleum Corp. and Pioneer Natural Resources Co., two of the largest producers in the Permian Basin, alone had a combined loss of about 3.8 million barrels. Meanwhile, refineries along the Gulf Coast are in the process of restarting, though some plants are facing lengthy repairs to critical processing units. The majority of the plants along Texas's refinery row are in the process of restarting, with most expected back online by mid-March.

Rumblings are starting to emerge that prices could once again top $100 a barrel by the end of next year. The Bank of America sees potential spikes above $100 over the next few years on improving fundamentals and global stimulus. Speculators are also getting in on the action, increasing bets in the options market that oil will reach the vaunted level by December 2022. These views are ultra-bullish, but they highlight increased confidence in the oil market after Brent rallied more than 200% after hitting an 18-year low during the pandemic. Demand has bounced back in key Asian markets, while OPEC+ is withholding barrels, and a lack of investment is keeping shale supplies at bay. Goldman Sachs this week lifted its third-quarter forecast by $10 to $75 a barrel.

The $100 mark occupies a special place in many traders' minds, as oil hovered around that level for several years in the early part of the last decade. In those years, demand from emerging markets enticed drillers into ever more expensive locales, from deep ocean beds to Canada's tar sands.

That era ended in 2014 when US shale firms proved they could pump massive amounts of oil at far lower costs. But while the vaunted price level has been out of the market's reach since then, it hasn't been out of traders' minds. Forecasts for $100 are far from the current consensus. The median analyst forecast compiled by Bloomberg has Brent staying below $65 a barrel through 2025. And there are plenty of reasons to be skeptical of such a resurgence. For one, the OPEC cuts that have limited supply are artificial, and the cartel has enough spare capacity to meet any shortfall should demand rocket following a worldwide recovery from the pandemic, according to Bloomberg Intelligence.

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Selected highlights from the 26 February 2021 issue of OilPrice.com’s Oil & Energy Insider include:

While downside risks remain, banks are now openly talking about the possibility of $100 oil at some point. OPEC+ still has the power to send oil prices down, but very few analysts are staking out overly bearish outlooks.

Traders betting on $100 oil. The open interest on $100 strike Dec 2022 calls has exploded higher since the turmoil in the Texas energy markets. $100 oil is still a gamble, but there is more interest in triple-digit oil prices than there has been in years.

Shell’s Deer Park refinery could take until April. Royal Dutch Shell’s Deer Park refinery in Texas could take until April to restart, following damage from the freeze across Texas.

China’s oil imports to slow. China’s oil imports in the second quarter are expected to slow in the face of higher prices and refinery maintenance.

OPEC+ considers modest production boost. OPEC+ will discuss a modest increase in oil production at next month’s meeting, sources told Reuters. The most likely number is an increase of 500,000 bpd beginning in April. At the same time, Saudi Arabia’s voluntary 1 mb/d cuts are set to expire.

Pioneer: U.S. shale no longer threat to OPEC. OPEC won’t have to worry about U.S. shale growth anymore, according to Pioneer Natural Resources. “I’m confident that we can assume the Iranian barrels into the marketplace over time and then U.S. shale is no longer going to be a threat to OPEC and OPEC+,” Scott Sheffield said.  

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.

February 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a rebound in the preponderance of U.S. manufacturers reporting expansion in February. The PMI registered 60.8%, up 2.1 percentage points (PP) from January’s 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. All but three of the sub-indexes posted higher readings, with backlogged orders (+4.3PP), input prices (+3.9PP, to the highest reading since July 2008), slow deliveries (+3.8PP), and new orders (+3.7PP) being the most notable.

“Aluminum, copper, chemicals, all varieties of steel, soy, petroleum-based products including plastics, transportation costs, electrical and electronic components, corrugate, and wood and lumber products all continued to record price increases,” observed Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee.

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The services sector -- which accounts for 80% of the economy and 90% of employment -- showed a pullback in service-sector respondents reporting expansion (-3.4PP, to 55.3%). The most noteworthy changes in the sub-indexes included exports (+10.6PP), inventories (+9.7PP), input prices (+7.6PP) and new orders (-9.9PP).

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Of the industries we track, only Real Estate contracted. The vast majority of respondents mentioned paying higher prices, including:

Construction. “Sales of residential real estate continue to be strong, even outstripping supply. Cost inflation in building materials seen as shortages develop from sporadic COVID-19 closures at manufacturing facilities. Port congestion on the West Coast [and] winter weather in Canada closing mills and restricting truck shipping are contributing to product shortages nationwide.”

Wood Products. “Prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.”

Relevant commodities:

Priced higher. Corrugate; corrugated boxes; paper products; wood products (lumber, plywood, OSB, and wood pallets); crude oil; natural gas; fuel (diesel and gasoline); freight (including ocean-going); and labor (general and temporary).

Priced lower. None.

Prices mixed. None.

In short supply. Corrugate; corrugated boxes; paper products; packaging; OSB; labor (general, construction and temporary); construction contractors; appliances (including refrigerators); freight (ocean); shipping containers.

 

Findings of IHS Markit‘s February survey results were mixed versus their ISM counterparts, but all agreed on higher prices.

Manufacturing. Production growth near six-year peak but price gauge highest since 2011

Key findings:

* Steep expansions in output and new orders
* Costs rise at steepest rate since April 2011 amid record supplier shortages
* Selling prices increase at sharpest pace since July 2008

 

Services. Steepest expansion in business activity since July 2014, but costs rise at record rate.

Key findings:

* Upturns in output and new business accelerate
* Cost burdens rise at steepest rate since survey began in 2009
* Employment growth moderates

 

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

Manufacturing. “Another month of strong production growth suggests that the US manufacturing sector is close to fully recovering the output lost to the pandemic last year, and a renewed surge in optimism suggests the recovery has much further to run. Business expectations about the year ahead jumped to a level only exceeded once over the past six years, buoyed by a cocktail of stimulus and post-COVID recovery hopes as life continues to return to normal amid vaccine roll outs.

“Particularly encouraging is a marked improvement in demand for machinery and equipment, hinting strongly at strengthening business investment spending. However, new orders for consumer goods showed the strongest back-to back monthly gains since the pandemic began, suggesting higher household spending is also feeding through to higher production.

“A concern is that shortages of raw materials have become a growing problem, with record supply chain delays reported in February, contributing to the steepest rise in material costs seen over the past decade. Prices charged for a wide variety of goods coming out of factories are consequently rising, which will likely feed through to higher consumer inflation.”

 

Services. “US business activity is growing at the fastest rate for six-and-a-half years, setting the economy up for a strong start to 2021. Although consumer-facing sectors, notably hospitality, travel, and tourism, continue to be adversely affected by COVID-19 restrictions, and will be for some time to come, other parts of the economy are springing back into life. Financial services and business services are faring well, accompanying a strong manufacturing recovery. Even some hard hit consumer-facing sectors are enjoying some loosening of restrictions or adapting to life with the virus.

“A wide variety of costs are rising, however, putting additional pressure on companies across the board. Many materials prices are sharply higher, transport costs are increasing and wage pressures are building as firms struggle to hire suitable staff, resulting in the largest monthly rise in service sector costs since comparable data were first available in 2009.

“Some of these higher costs will inevitably prove transitory as pandemic-related disruptions to supply start to ease, but it remains unclear how long these price pressures will persist for due to uncertainties over the duration of social distancing requirements and the strength of demand over the coming months.”

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.

February 2021 Currency Exchange Rates

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In February the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-0.2%), but appreciated against the euro (+0.7%) and Japanese yen (+1.5%). On the broad trade-weighted index basis (goods and services), the USD strengthened by 0.5% 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.