May 2021 Residential Sales, Inventory and Prices

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Sales of new single-family houses in May 2021 were at a seasonally adjusted annual rate (SAAR) of 769,000 units (881,000 expected). This is 5.9% (±18.6%)* below the revised April rate of 817,000, but 9.2% (±28.7%)* above the May 2020 SAAR of 704,000 units; the not-seasonally adjusted (NSA) year-over-year comparison (shown in the table above) was +7.8%. For longer-term perspectives, NSA sales were 44.6% below the “housing bubble” peak but 32.0% above the long-term, pre-2000 average.

The median sales price of new houses sold in May rose ($9,100 or +2.5% MoM) to a new record-high $374,400; meanwhile, the average sales price rose to (also a new record-high) $430,600 ($9,700 or +2.3% MoM). Starter homes (defined here as those priced below $200,000) comprised 2.0% of the total sold, down from the year-earlier 12.5%; 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 0.7% of sales, down from 1.6% 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 May, single-unit completions fell by +26,000 units (-2.6%). Because sales fell by an greater amount (48,000 units; -5.9%), inventory for sale rose in absolute (+15,000 units) and months-of-inventory (+0.5 month) terms. 

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Existing home sales retreated further in May (50,000 units or -0.9%), to a SAAR of 5.80 million units (5.715 million expected). Inventory of existing homes for sale expanded in absolute (80,000 units) and months-of-inventory (0.1 month) terms. Because resales fell on a smaller proportional basis than new-home sales, the share of total sales comprised of new homes slipped to 11.7%. The median price of previously owned homes sold in May advanced to a record $350,300 ($9,700 or +2.8% MoM).

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Housing affordability slumped by 19.2 percentage points as the median price of existing homes for sale in April rose by $14,700 (+4.4% MoM; +19.9 YoY), to $346,200. 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 +2.1% (+14.6% YoY).

“Housing prices accelerated their surge in April 2021,” said Craig Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The National Composite Index marked its eleventh consecutive month of accelerating prices with a 14.6% gain from year-ago levels, up from 13.3% in March. This acceleration is also reflected in the 10- and 20-City Composites (up 14.4% and 14.9%, respectively). The market’s strength is broadly-based: all 20 cities rose, and all 20 gained more in the 12 months ended in April than they had gained in the 12 months ended in March.

“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data. Housing prices in all 20 cities rose; price gains in all 20 cities accelerated; price gains in all 20 cities were in the top quartile of historical performance. In 15 cities, price gains were in top decile. Five cities -- Charlotte, Cleveland, Dallas, Denver, and Seattle -- joined the National Composite in recording their all-time highest 12-month gains.

“We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.

“Phoenix’s 22.3% increase led all cities for the 23^rd consecutive month, with San Diego (+21.6%) and Seattle (+20.2%) providing strong competition. Although prices were strongest in the West (+17.2%) and Southwest (+16.9%), every region logged double-digit gains.”

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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.

1Q2021 Gross Domestic Product: Third Estimate

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In its third estimate of 1Q2021 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 +6.36% (+6.4% expected), down 0.04 percentage point (PP) from the second estimate (“1Qv2”) but +2.04PP from 4Q2020.

As noted in prior 1Q reports, two of the four groupings of GDP components -- personal consumption expenditures (PCE) and government consumption expenditures (GCE) -- contributed to 4Q growth; private domestic investment (PDI) and net exports (NetX) detracted.

Given the minor adjustment to the headline number, this report does not contain any material revisions. Most of the upward revision to the growth in consumer spending on goods was offset by a similar reduction in the consumer services line item. The real upward revisions were in commercial fixed investments and inventories. Foreign trade had the largest revisions, with imports pulling the headline down by an additional -0.38pp. As for details (all relative to 1Qv2):

* PCE. As mentioned above, consumer spending on goods was revised up (+$10.6 billion, nominal dollars), led by food and beverages purchased for off-premises consumption (+$4.6B). Spending on services was revised down (-$9.7B), led by health care (-$15.4B); that was partially offset by financial services and insurance (+$8.3B) and recreation services (+$7.9B).

* PDI. The QoQ dip in PDI was lessened somewhat by upward revisions to nonresidential structures (+$5.5B), information processing equipment (+$4.3B), and nonfarm inventories (+$4.7B).

* NetX. The drag on the headline number from net exports deepened as upward revisions to exports (+$5.6B) were swamped by upward revisions to imports (+$19.4B). Recall that an increase in imports reduces the headline number.

* GCE. Revisions in this category netted out to +$0.2B.

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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 both goods and services grew at rates that under "normal" conditions would be considered healthy.

-- Commercial investments are still growing at a respectable rate, even as that growth has softened somewhat over the past three quarters. Most of that investment growth continues to be in IT infrastructure and residential housing.

“As mentioned above, this final report for 1Q2021 contains no material revisions,” Davis observed. “Next month the BEA unleashes its annual revision cycle, which is likely to reveal new insights into just how the pandemic displaced the U.S. economy. And we look forward to finding out if the economic ‘normalization’ seen in 1Q2021 continues to have legs.”

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.

April 2021 International Trade (Softwood Lumber)

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Softwood lumber exports rose (14 MMBF or +13.7%) in April, as did imports (11 MMBF or +0.7%). Exports were 37 MMBF (+46.5%) above year-earlier levels; imports were 264 MMBF (+22.0%) higher. As a result, the year-over-year (YoY) net export deficit was 227 MMBF (+20.2%) larger. Also, the average net export deficit for the 12 months ending April 2021 was 11.9% 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 (54.0%; of which Canada: 32.8%; Mexico: 21.2%), Asia (13.2%; especially China: 3.9%; and Japan: 3.7%), and the Caribbean: 27.0% (especially the Dominican Republic: 13.1%) were the primary destinations for U.S. softwood lumber exports. Year-to-date (YTD) exports to China were -50.7% relative to the same months in 2020. Meanwhile, Canada was the source of most (85.0%) of softwood lumber imports into the United States. Imports from Canada were 13.3% higher YTD than the same months in 2020. Overall, YTD exports were up 2.0% compared to 2020; imports: +14.8%.

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U.S. softwood lumber export activity through the West Coast customs region represented 36.1% of the U.S. total; Gulf: 25.8%, and Eastern: 24.4%. Seattle (18.8% of the U.S. total) was the single most-active district, followed by Mobile (18.7%) and San Diego (14.1%). At the same time, Great Lakes customs region handled 56.1% of softwood lumber imports -- most notably the Duluth, MN district (21.9%) -- coming into the United States. 

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Southern yellow pine comprised 23.4% of all softwood lumber exports; Douglas-fir (13.7%) and treated lumber (12.6%) were also significant. Southern pine exports were down 22.2% YTD relative to 2020, while Doug-fir: +3.4%; and treated: +0.1%.

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.

May 2021 Residential Permits, Starts and Completions

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Builders started construction of privately-owned housing units in May at a seasonally adjusted annual rate (SAAR) of 1,572,000 units (1.630 million expected). This is 3.6% (±10.3%)* above the revised April estimate of 1,517,000 (originally 1.569 million units) and 50.3% (±15.1%) above the May 2020 SAAR of 1,046,000 units; the not-seasonally adjusted YoY change (shown in the table above) was +50.5%. 

Single-family housing starts in May were at a rate of 1,098,000; this is 4.2% (±9.2%)* above the revised April figure of 1,054,000 units (+49.0% YoY). Multi-family: 474,000 units (+2.4% MoM; +54.0% 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 1,368,000 units. This is 4.1% (±9.8%)* below the revised April estimate of 1,426,000 (originally 1.449 million units), but 16.1% (±10.9%) above the May 2020 SAAR of 1,178,000 units; the NSA comparison: +15.7% YoY. 

Single-family housing completions were at a SAAR of 978,000; this is 2.6% (±7.9%)* below the revised April rate of 1,004,000 units (+17.1% YoY). Multi-family: 390,000 units (-7.6% MoM; +12.4% YoY).

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Total permits amounted to a SAAR of 1,681,000 units (1.750 million expected). This is 3.0% (±1.4%) below the revised April rate of 1,733,000 (originally 1.760 million units), but 34.9% (±2.4%) above the May 2020 SAAR of 1,246,000 units; the NSA comparison: +32.3% YoY. 

Single-family permits were at a SAAR of 1,130,000; this is 1.6% (±0.9%) below the revised April figure of 1,148,000 units (+48.4% YoY). Multi-family: 551,000 units (-5.8% MoM; +6.1% YoY).

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Rising material prices and supply chain shortages resulted in builder confidence dipping to its lowest level since August 2020. The NAHB/Wells Fargo Housing Market Index (HMI) showed that builder confidence in the market for newly built single-family homes fell two points to 81 in June. Despite the monthly decline, the reading above 80 is still a signal of strong demand in a housing market lacking inventory.

“Higher costs and declining availability for softwood lumber and other building materials pushed down builder sentiment in June,” said NAHB Chairman Chuck Fowke. “These higher costs have moved some new homes beyond the budget of prospective buyers, which has slowed the strong pace of home building. Policymakers need to focus on supply-chain issues in order to allow the economic recovery to continue.”

“While builders have adopted a variety of business strategies including price escalation clauses to deal with scarce building materials, labor and lots, unavoidable increases for new home prices are pushing some buyers to the sidelines,” said NAHB Chief Economist Robert Dietz. “Moreover, these supply-constraints are resulting in insufficient appraisals and making it more difficult for builders to access construction loans.”

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.

May 2021 Industrial Production, Capacity Utilization and Capacity

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Total industrial production (IP) increased 0.8% in May (+0.6% expected). Manufacturing production advanced 0.9%, reflecting, in part, a large gain in motor vehicle assemblies; factory output excluding motor vehicles and parts increased 0.5%. The indexes for mining and utilities rose 1.2% and 0.2%, respectively.

In May, at 99.9% of its 2017 average, total IP was 16.3% higher than it was a year earlier but 1.4% lower than its pre-pandemic (February 2020) level. 

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Industry Groups

Manufacturing output advanced 0.9% in May. The index for durable manufacturing (including wood products: -0.8%) stepped up 1.0%, with the bulk of the increase resulting from a gain of 6.7% for motor vehicles and parts. Overall vehicle assemblies jumped about 1 million units to 9.9 million units (annual rate); even so, they remained more than 1 million units below their average level in the second half of 2020, as production continued to be hampered by shortages of semiconductors. The index for nondurables rose 0.8%; nearly all of its components posted gains (paper products: -1.6%). Advances of more than 2% were recorded by apparel and leather, by printing and support, and by chemicals. The improvement in chemicals chiefly reflected the reopening of some additional petrochemical plants that had been out of commission due to damage from the frigid conditions in February. The output of other manufacturing (publishing and logging) increased 0.8%.

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Capacity utilization (CU) for the industrial sector rose 0.6 percentage point (PP) in May to 75.2%, a rate that is 4.4PP below its long-run (1972–2020) average.

Manufacturing CU increased 0.9% in May to 75.8% (wood products: -0.8%; paper products: -1.6%). The operating rate for mining increased 0.9PP to 75.2%, while the operating rate for utilities was unchanged at 72.8%. The rates for all three sectors remained below their long-run averages.

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Capacity at the all-industries level was unchanged MoM (0.0% YoY) at 132.7% of 2017 output. Manufacturing was also unchanged (-0.2% YoY) at 130.3%. Wood products: 0.0% (+0.5% YoY) at 123.1%; paper products: +0.1% (-0.1% YoY) to 113.3%.

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.

May 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 0.6% in May (+0.4% expected) after rising 0.8% in April. The index for used cars and trucks continued to rise sharply, increasing 7.3% in May. This increase accounted for about one-third of the seasonally adjusted all-items increase. The food index increased 0.4% in May, the same increase as in April. The energy index was unchanged in May, with a decline in the gasoline index again offsetting increases in the electricity and natural gas indexes.

The index for all items less food and energy rose 0.7% in May after increasing 0.9% in April. Many of the same indexes continued to increase, including used cars and trucks, household furnishings and operations, new vehicles, airline fares, and apparel. The index for medical care fell slightly, one of the few major component indexes to decline in May. 

Over the last 12 months, the all-items index increased 5.0% -- the largest 12-month increase since a 5.4% increase for the period ending August 2008; it has been trending up every month since January, when the 12-month change was 1.4%. The index for all items less food and energy rose 3.8% over the last 12 months, the largest 12-month increase since the period ending June 1992. The energy index rose 28.5% over the last 12-months, and the food index increased 2.2%.

Producer Price Index

The Producer Price Index for final demand (PPI-FD) increased 0.8% in May (+0.6% expected). Final demand prices rose 0.6% in April and 1.0% in March. Nearly 60% of the May increase in the index for final demand can be traced to a 1.5% rise in prices for final demand goods. The index for final demand services moved up 0.6%. Prices for final demand less foods, energy, and trade services increased 0.7% in May, the same as in April.

On an unadjusted basis, the final demand index advanced 6.6% for the 12 months ended in May, the largest increase since 12-month data were first calculated in November 2010. For the 12 months ended in May, the index for final demand less foods, energy, and trade services climbed 5.3%, the largest increase since 12-month data were first calculated in August 2014.

Final Demand

Final demand goods: Prices for final demand goods advanced 1.5% in May after rising 0.6% in April. Over 40% of the broad-based increase in May can be traced to the index for final demand goods less foods and energy, which moved up 1.1%. Prices for final demand foods and for final demand energy also advanced, 2.6% and 2.2%, respectively.

Product detail: Within the index for final demand goods in May, prices for nonferrous metals rose 6.9%. The indexes for beef and veal; diesel fuel; gasoline; hay, hayseeds, and oilseeds; and motor vehicles also advanced. In contrast, prices for fresh fruits and melons declined 1.9%. The indexes for primary basic organic chemicals and for asphalt also moved lower.

Final demand services: Prices for final demand services rose 0.6% in May, the fifth consecutive increase. Forty% of the broad-based May advance can be traced to the index for final demand trade services, which moved up 0.7%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services also rose, 0.2% and 1.9%, respectively.

Product Detail: Over 40% of the May increase in the index for final demand services is attributable to margins for automobile retailing (partial), which jumped 27.3%. The indexes for truck transportation of freight; apparel, footwear, and accessories retailing; portfolio management; chemicals and allied products wholesaling; and hardware, building materials, and supplies retailing also rose. Conversely, margins for food retailing fell 3.6%. The indexes for traveler accommodation services and for airline passenger services also decreased.

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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.

April 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 April increased $1.8 billion or 0.4% to $487.8 billion. Durable goods shipments increased $1.5 billion or 0.6% to $249.0 billion, led by primary metals. Meanwhile, nondurable goods shipments increased $0.2 billion or 0.1% to $238.9 billion, led by chemical products. Shipments of wood products rose by 1.3%; paper: +1.0%.

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Inventories increased $2.4 billion or 0.3% to $723.6 billion. The inventories-to-shipments ratio was 1.48, unchanged from March. Inventories of durable goods increased $2.3 billion or 0.5% to $441.8 billion, led by transportation equipment. Nondurable goods inventories increased $0.1 billion or virtually unchanged to $281.8 billion, led by beverage and tobacco products. Inventories of wood products rose by 1.3%; paper: +0.8%.

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New orders decreased $2.9 billion or 0.6% to $485.2 billion. Excluding transportation, new orders rose by $2.0 billion or 0.5% (+24.1% YoY). Durable goods orders decreased $3.2 billion or 1.3% to $246.3 billion, led by transportation equipment. New orders for non-defense capital goods excluding aircraft -- a proxy for business investment spending -- increased by $1.6 billion or 2.2% (+27.0% YoY). New orders for nondurable goods increased $0.2 billion or 0.1% to $238.9 billion.

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Unfilled durable-goods orders increased $1.8 billion or 0.2% to $1,196.9 billion, led by fabricated metal products. The unfilled orders-to-shipments ratio was 6.84, down from 7.00 in March. 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 103% of their December 2008 peak. Real unfilled orders then jumped to 109% of the prior peak in July 2014, thanks to the largest-ever batch of aircraft orders. Except for the year-long run up during 2019, real unfilled orders have been trending lower since November 2014.

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.

May 2021 Employment Report

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The Bureau of Labor Statistics’ (BLS) establishment survey showed non-farm employers added 559,000 jobs in May (well below consensus expectations of 645,000). March and April employment changes were revised up by a combined 27,000 (March: +15,000; April: +12,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) fell by 0.3 percentage point, to 5.8%, as the ranks of the unemployed shrank (-496,000) faster than the civilian labor force (-53,000). 

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Observations from the employment reports include:

* Goods-producing industries gained only 3,000 jobs; service-providers: +556,000. Notable job gains occurred in leisure and hospitality (+292,000 -- nearly two-thirds of which were in food services and drinking places), in public and private education (+143,700), and in health care and social assistance (+45,800). Manufacturing added 23,000 jobs. That result is somewhat consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded more slowly in May. Wood Products employment slipped by 100 (ISM unchanged); Paper and Paper Products: -2,100 (ISM unchanged); Construction: -20,000 (ISM increased).

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* The number of employment-age persons not in the labor force rose (160,000) to 100.3 million. Even so, the employment-population ratio (EPR) ticked up to 58.0%; i.e., nearly six out of 10 in the employment-age population are presently employed. 

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* Because the civilian labor force shrank by 53,000 in May, the labor force participation rate slipped fractionally to 61.6%. Average hourly earnings of all private employees increased by $0.15 (to $30.33), and the year-over-year increase jumped back to just +2.0%. For all production and nonsupervisory employees (shown above), the tale was much the same: hourly wages rose by $0.14, to $25.60 (+2.4% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.9 hours, average weekly earnings increased by $5.24, to $1,058.52 (+4.3% YoY). With the consumer price index running at an annual rate of +4.2% in April, even those who are employed are -- on average -- barely keeping up with the official inflation rate.

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* Full-time jobs rose (+223,000) to 126.4 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 – inched up by 28,000, whereas those working part time for non-economic reasons advanced by 103,000; multiple-job holders jumped by 353,000.

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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 May fell by $17.5 billion, to $210.5 billion (-7.7% MoM; +22.3% 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 May was 18.8% 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.

May 2021 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a slight increase in the proportion of U.S. manufacturers reporting expansion in May. The PMI registered 61.2%, a rise of 0.5 percentage point (PP) from the April 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 for new orders (+2.7PP), slow deliveries (+3.8PP) and backlogged orders (+2.4PP) all exhibited small increases.

“The manufacturing economy continued expansion in May,” observed Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

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The services sector -- which accounts for 80% of the economy and 90% of employment -- rebounded to a new all-time high of service-sector respondents reporting expansion (+1.3PP, to 64.0%). The most noteworthy changes in the sub-indexes included slow deliveries (+4.3PP), input prices (+3.8PP) and imports (-5.3PP).

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All of the industries we track expanded. Respondent comments included the following:

Construction. “We are still busy and adding employees. One of the biggest concerns now is shortages of crucial material and equipment… Equipment and material suppliers have been raising prices since the first of the year. We hear of a new increase almost daily.”

Real Estate. “Business is very strong, and customer orders continue to increase at a rapid pace. Material shortages, increased prices and qualified personnel shortages are becoming a much larger concern.”

 

Findings of IHS Markit‘s May survey results were generally consistent with their ISM counterparts.

Manufacturing. Production growth accelerates amid stronger client demand, but supply chain disruption remains marked

Key findings:

* Output expands at faster rate as growth in new order inflows strengthens
* Supply chain disruption leads to soaring cost pressures
* Backlogs of work rise at quickest pace on record

 

Services. Business activity growth rate accelerates to record high in May

Key findings:

* Stronger client demand spurs sharper output expansion
* Cost burdens rise at quickest pace on record
* Further steep increase in employment despite hiring

 

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

Manufacturing. “US manufacturers are enjoying a bumper second quarter, with the PMI hitting a new high for the second month running in May. Inflows of new orders are surging at a rate unsurpassed in 14 years of survey history, buoyed by reviving domestic demand and record export sales as economies reopen from COVID-19 restrictions. However, elevated levels of other survey indicators are less welcome: prices charged by manufacturers are also rising at an unprecedented rate, linked to soaring input costs and unparalleled capacity constraints.

“Not only is operating capacity being curbed by record supply chain delays so far in the second quarter, but firms have also been increasingly unable to hire sufficient staff. Hence backlogs of work are building up at an unprecedented rate, as firms struggle to meet demand.

“These backlogs of orders should support further production growth in the next few months, adding to signs of impressive economic expansion over the summer. But manufacturers’ expectations further ahead have moderated, hinting that the growth rate is peaking, linked to worries about capacity limits being reached, rising prices hitting demand and a peaking of stimulus measures.”

 

Services. “The US economic recovery shifted up a gear in May, with output of the combined manufacturing and service sectors surging past all prior peaks by an impressive margin. The strong correlation between the PMI and GDP means the economy looks set to enjoy rapid -- potentially double-digit -- growth in the second quarter.

“Further robust expansions are indicated for the summer months, with an improving order book situation accompanied by elevated levels of business confidence and the further easing of virus restrictions both at home and abroad. But the survey’s price gauges have also climbed to unsurpassed levels, which will add to inflation worries. These unprecedented output and price growth rates will inevitably lead to speculation about an earlier than previously expected tapering of Fed policy.”

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.

May 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 $3.45 (+5.6%), to $65.17 per barrel in May. That increase occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of March’s rebound of 1.76 million barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 17.9 million BPD, and a continued decline in accumulated oil stocks (May average: 484 million barrels).

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From the 24 May 2021 issue of The Energy Bulletin:

Global oil demand is recovering with major economies reopening amid a cautious supply approach from OPEC+ and restraint in US shale, Barclays said on Friday (5/21). Despite the possibility of a return of Iranian oil supply and the resurgence of COVID in parts of Asia, global oil demand is “healing,” and oil inventories are set to normalize over the next two to three months, the UK bank said in a note on Friday. Barclays expects the global market to be in a deficit of around 1.5 million b/d in the second half of this year.

Shale Oil. The shale industry, much maligned by investors for excessive spending without returns to show for it, has managed to resist expansion during a 22% run-up in oil prices during the first three months of this year, holding output almost flat. A round-up of data on the drillers shows expectations for record free-cash-flow and signs that the industry is starting to pay its way. There are also indications that workers are finally returning to the fields while drilling ramps up at a more moderate pace.

When squeezing out more oil and gas for less money is a priority for upstream producers, longer laterals are giving a competitive edge in unconventional basins in the US, producing more hydrocarbons per foot drilled. Laterals – the horizontal portion of a well – have become longer and longer during the last 15 years. Drilling out 15,000 feet, or nearly three miles horizontally, reduces the number of wells companies need to drill to achieve their production goals and does it at increasingly lower costs.

Prognosis. The possibility of a peak oil supply crisis is starting to bother some industry observers. In recent years it has become fashionable to talk about peak oil demand, brought about by the climate crisis, rather than about oil supplies running short. As a result of seven years of falling investment and given the capital-intensive nature of the oil business, global offshore production (about 1 in 4 barrels produced) has entered a period where new projects cannot offset existing declines and, at best, production will stay flat for the next several years. This significant loss of future capacity means the burden falls on US shale and OPEC to satisfy demand growth, yet the ability to do so is a problem.

While US shale basins have acted as the global swing producer in recent years, the era of US shale hyper-growth is over. The failed experiment of unbridled spending due to unlimited access to external capital resulted in the incineration of hundreds of billions of dollars of shareholder equity and a subsequent investor-led change to shale companies’ very ethos. The old model of massively outspending cash flow and chasing growth has evolved to underspending, which has led to the return of capital back to investors in the form of dividends and share buybacks. This profound change, combined with the depletion of much of the higher quality drilling inventory, means that the future growth rate of US shale will be a fraction of years past.

For OPEC countries the ability to remain going concerns and satisfy their sovereign needs has struggled for years with insufficient revenue due to weak oil prices. Many had to deplete foreign exchange reserves, sell off stakes in crown corporations, and cut social spending, thereby risking regime change due to violating the unspoken social contract with their populaces. The least attractive use of scarce capital was an investment in new oil productive capacity, especially in an era of low oil prices.

While the market is currently concerned with the return of some 6 million b/d of voluntarily curtailed OPEC production, given the stronger-than-expected rebound in global oil demand, these volumes will be quickly returned without disrupting oil balances by early 2022. As a result of sovereign needs superseding the investment in new capacity once this curtailed production returns, OPEC will exhaust its spare capacity and cannot significantly grow in the years ahead. This milestone will rival the importance of the end of US shale hyper-growth and could mark the beginning of a multi-year bull market for oil.

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Selected highlights from the 28 May 2021 issue of OilPrice.com’s Oil & Energy Insider include:

[The last full week of May] was a historic week for the oil industry, potentially marking a turning point, at least for the corporate strategies of the oil majors. More curbs on the supply side do add some bullish sentiment to the market, although the impacts on the fundamentals are not necessarily going to unfold in the near term. But in the wake of the huge blows to the oil majors this week, more than a few analysts spoke about growing odds of a supply crunch in the years ahead.

Shell loses in court. Royal Dutch Shell lost a landmark legal case in a Dutch court, which, if it stands, will require 45% cuts in GHG emissions by 2030. The case is seen as a warning sign for the rest of the oil industry, signaling legal exposure to Scope 3 emissions (those burned by end-users). More litigation related to emissions is likely.

Exxon loses board vote. Engine No. 1 won votes for two if its candidates in a stunning blow to ExxonMobil. The win is being viewed as a shocking and powerful statement by shareholders as to their displeasure with the oil giant for not doing enough to mitigate the effects of its business on the climate. And For Exxon, it could mean big changes are coming.

Court ruling could shrink Shell. The court ruling ordering Shell to speed up its plans to cut greenhouse gas emissions could lead to a 12% decline in the company's energy output, including a sharp drop in oil and gas sales, according to Reuters.

Exxon must cut production, Engine No. 1 says. Engine No. 1 said that ExxonMobil must cut oil production. “They need to position themselves for success,” Charlie Penner, of Engine No. 1, told the FT. “You would certainly believe that would mean less oil and gas production going forward.” The hedge fund’s founder, Chris James, added: “Watching that meeting yesterday was such a perfect example of how they don’t realize the world has changed. It was all on display.”

Chevron shareholders vote for Scope 3. Chevron also lost a notable shareholder vote, with a measure requiring a target to reduce Scope 3 emissions passed by more than 60% of shareholders, another major rebuke to the oil industry.

Oil rises after boardroom brawls. Oil prices rose early on Friday for a sixth consecutive day and were on track for weekly and monthly gains after the defeats on climate policies that major oil firms suffered at the hands of shareholders and judges.

Total to see investor pressure. On the heels of the string of losses suffered by Exxon, Chevron, and Shell, France’s Total (NYSE: TOT) is facing growing scrutiny from investors over its corporate strategy.

Biden defends Alaska oil project. President Biden’s administration has backed the Willow oil project in Alaska in a new filing by the Department of Justice.

Moody’s: Credit risks growing for Big Oil. This week’s climate-related actions in boardrooms and courtrooms involving some of the largest international oil companies signal a rising threat to the sector, Moody’s Investor Service said in a comment on the industry. “A new court ruling against Royal Dutch Shell and shareholder votes at ExxonMobil and Chevron highlights the increasing credit risk for major oil producers over concerns about climate change,” Moody’s 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.

May 2021 Currency Exchange Rates

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In May the monthly average value of the U.S. dollar (USD) depreciated versus Canada’s “loonie” (-3.0%) and euro (-1.5%), but appreciated against the Japanese yen (+0.1%). On the broad trade-weighted index basis (goods and services), the USD weakened by 1.3% 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.