January 2016 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil in January dropped to its lowest point since November 2003, retreating by $5.51 (-14.8%), to $31.68 per barrel. The price decline coincided with a stronger U.S. dollar, the lagged impacts of a 162,000 barrel-per-day (BPD) decrease in the amount of oil supplied/demanded in November (to 19.4 million BPD), and another uptick in the accumulation of oil stocks. The monthly average price spread between Brent crude (the predominant grade used in Europe) and WTI reversed for the first time since August 2010; Brent was $0.98 per barrel cheaper than WTI. 

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Commentary from ASPO-USA’s Peak Oil Review editor Tom Whipple: 

Last week [i.e., the last week of January] there was a surge in oil prices based on rumors and statements from Iraq's oil minister and a Russian pipeline official that Russia and the Saudis might be considering a meeting to discuss "coordination" of their oil production. The merest hint of a supply cut was enough to send traders into a frenzy. Short positions were covered and prices rose from below $30 a barrel to nearly $36 in London. The story was quickly denied by numerous OPEC officials and even by Russia's deputy prime minister, but oil prices stayed firm closing at $33.62 in New York and $34.74 in London [the rebound can be seen in the graph below].

The bottom line in this frenzy, which took oil prices up nearly 25 percent, is that Iran says flatly it will not cut oil production until its exports increase by 1.5 million BPD; the Saudis say they will not cut unless other exporters including Iran and Russia do; and Moscow says it will not cut unless it is in coordination with OPEC, but hopes for higher prices die hard. This week Venezuela's oil minister will make the rounds, visiting Russia, Qatar, Iran and Saudi Arabia in an effort to set up a meeting in February to "coordinate" oil production. Numerous outside observers have termed the rumors of coordinated production cuts as rubbish and expect further declines in oil prices this winter.

In the meantime, fundamentals continue to worsen. U.S. crude inventories increased by 8.4 million BPD in last week's stocks report; Iraq announced record-high oil production; and OPEC output continues to grow.  According to a Reuters survey, OPEC oil production climbed to its highest level in recent history in January as Iran increased production and sales following the lifting of sanctions, and the Saudis and Iraq increased output.

EIA's Monthly Energy Review is out with new production numbers. U.S. production (crude and condensate) in December is given as 9.19 million BPD down 500,000 BPD from the 9.69 million produced in April. Non-OPEC production was down by 763,000 BPD from 47.2 million BPD in December 2014 to 46.4 million last October. World production (crude and concentrate) which peaked in July at 80.5 million BPD was down by 461,000 BPD to 80.0 million in October.  While non-OPEC production will likely continue to fall for a while due to the massive reduction in capital investment that has and continues to take place, OPEC with increasing Iranian production seems destined to offset the non-OPEC production decline for this year at least.

Last week brought a plethora of bad news concerning falling oil company profits, reduced capital investment, pending bankruptcies, and scrapping of expensive drilling rigs. All this is bound to greatly lower oil production by the end of the decade. 

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Commentary from OilPrice Intelligence Report editor Evan Kelly: 

The prospect of cooperation between OPEC and Russia was always a long shot, and the markets apparently have started to come around to that realization. Crude prices fell sharply at the start of this week as hopes faded for coordinated production cuts.

Russia revealed that it hit another post-Soviet record high in oil production in January, breaking the previous record set in December. Output stood at 10.88 mb/d. Venezuela's oil minister Eulogio Del Pino visited Moscow to discuss the possibility of coordinating with OPEC but nothing new came from the meeting. Venezuela is desperate for oil prices to stabilize, but Russian officials merely issued the same suggestions that they did last week, which was that they were open to discuss the possibility. Investors should not expect much to come from this unless more concrete pledges are issued by all parties involved.

The latest manufacturing data from China also poured cold water on oil prices at the start of the week. China's manufacturing purchasing managers index dropped to 49.4 in January, down from 49.7 in December. A reading below 50 indicates a contraction. January was the sixth consecutive month of a contraction, and manufacturing activity in China is now at its lowest level since August 2012.

BP and ExxonMobil reported earnings on Tuesday. BP posted the worst loss in recent memory, down $6.5 billion for the full-year of 2015. Earnings were down by 91 percent in the fourth quarter, which was also the sixth consecutive quarter in which earnings were lower than the previous. BP's market cap is now below $100 billion for the first time since the Deepwater Horizon disaster in 2010.

ExxonMobil fared better, with earnings of $16.1 billion for the full-year, although those figures were 50 percent lower than for 2014. The oil majors continue to show determination in sticking to their dividend policies, although it is unclear how long that can keep up. Net debt continues to rise in order to fund the generous dividends.

Decommissioning oil rigs in the North Sea could accelerate this year because of low oil prices, according to Wood Mackenzie. The North Sea has high production costs and many producing fields are in the waning years of their operating lifespans. Companies are trying to squeeze out the remaining reserves, but low prices could force up to 50 oil and gas fields to permanently shut in production this year. After that, the platforms and rigs that have been in place for decades would be decommissioned. The smaller and more expensive fields are where the industry will start first, but Wood Mac expects 140 fields in UK waters to be shuttered over the next five years. Decommissioning brings its own set of costs, and some companies might rather continue to pump than take on the costs of dismantling infrastructure. Nevertheless, decommissioning in the North Sea will pick up and will become its own growth industry in the years ahead.

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 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the contraction in U.S. manufacturing slowed marginally in January. The PMI registered 48.2%, an increase of 0.2 percentage point from the December reading of 48.0%. (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. Changes to key internal sub-indexes included small expansions in new orders and imports, a further decline in employment, and a drop in exports. 

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Wood Products expanded on new and export orders, although one commenter mentioned that the “market is sluggish to start the year.” Paper Products contracted on broad-based erosion.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- tumbled in January. The NMI registered 53.9%, 5.6 percentage points lower than the December reading of 59.5%, and the weakest level since February 2014. With the exception of supplier deliveries and order backlogs, all sub-index values were lower in January than in December. 

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Real Estate and Construction reported increased activity, whereas Ag & Forestry declined.

Relevant commodities higher in price included some lumber products; oil, diesel fuel and gasoline were cheaper. No relevant commodity was in short supply.

ISM’s and Markit’s surveys paralleled each other again in January: ISM’s PMI contracted more slowly while Markit’s Manufacturing PMI exhibited slightly faster expansion. The pace of growth decelerated in both ISM’s NMI and Markit’s Services PMI.

Comments from Markit Chief Economist Chris Williamson are presented below:

Manufacturing -- “Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector.

“One bright light appeared, in that order book growth picked up, led by an upturn in domestic demand. However, hiring remained in the doldrums, suggesting that firms remain cautious in relation to the business outlook and reluctant to expand capacity.

“The manufacturing sector continues to struggle against the headwinds of weak global demand, the strong dollar, slumping investment in the energy sector and rising financial market uncertainty, all of which mean the goods-producing sector looks set to act as a drag on the wider economy again in the first quarter of 2016.”

Services -- “The PMI surveys show the service sector losing momentum alongside a stalling of growth in the manufacturing sector, pushing the overall rate of economic expansion down to the weakest for a year.

“The US upturn has lost substantial momentum over the past two months, the trend in business activity sliding to the worst for over three years.

“Slower service sector activity, combined with subdued manufacturing growth, means January’s expansion was the weakest seen since October 2012 with the sole exception of October 2013, when business was affected by the government shutdown.

“Deteriorating financial market conditions, global growth uncertainties and the upcoming election are all taking their toll, not to mention the strong dollar, which is not only hurting manufacturing but is also hitting the service sector through reduced tourism and travel.

“Payroll growth remained robust, but backlogs of uncompleted work have been falling in recent months, which usually means that such strong hiring is unlikely to persist unless demand picks up again in coming months.

“While the first quarter may see a rebound in GDP due to technical factors such as an inventory adjustment and weather-related variations, the survey data paint a darker underlying picture of business conditions.”

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 2016 Currency Exchange Rates

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In January the monthly average value of the U.S. dollar was mixed against the three major currencies we track. The greenback gained 3.6% against Canada’s “loonie” and 0.3% against the euro, but depreciated 2.8% against the yen. On a trade-weighted index basis, the dollar strengthened by 2.3% 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.

December 2015 Construction Spending

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Construction spending during December 2015 was estimated at a seasonally adjusted annual rate (SAAR) of $1,116.6 billion, 0.1 percent (±1.2%)* above the revised November estimate of $1,116.0 billion. The December SAAR is 8.2 percent (±1.8%) above the December 2014 SAAR of $1,031.6 billion. The YoY percentage change in the not-seasonally adjusted estimates (shown in the above table) was +8.0%

The value of construction in 2015 was $1,097.3 billion, 10.5 percent (±1.2%) above the $993.4 billion spent in 2014.

PRIVATE CONSTRUCTION

Spending on private construction was at a SAAR of $824.0 billion, 0.6 percent (±0.8%)* below the revised November estimate of $828.8 billion. Residential construction: $429.6 billion, 0.9 percent (±1.3%)* above the revised November estimate of $425.8 billion. Nonresidential construction: $394.4 billion, 2.1 percent (±0.8%) below the revised November estimate of $403.0 billion.

The value of private construction in 2015 was $806.1 billion, 12.3 percent (±1.5%) above the $717.7 billion spent in 2014. Residential: $416.8 billion, 12.6 percent (±2.1%) above the 2014 figure of $370.0 billion; nonresidential: $389.3 billion, 12.0 percent (±1.5%) above the $347.7 billion in 2014.

PUBLIC CONSTRUCTION

In December, the estimated SAAR of public construction spending was $292.5 billion, 1.9 percent (±2.0%)* above the revised November estimate of $287.1 billion. Educational construction: $69.4 billion, -0.5 percent (±3.9%)*. Highways: $95.4 billion, +9.4 percent (±4.4%).

The value of public construction in 2015 was $291.2 billion, 5.6 percent (±1.6%) above the $275.7 billion spent in 2014. Educational construction: $67.3 billion, +6.8 percent (±3.5%); highways: $89.6 billion, +6.7 percent (±3.9%).

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

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

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

4Q2015 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 4Q2015 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported the U.S. economy was growing at a +0.69% seasonally adjusted and annualized rate (SAAR), well below the +0.9% expected and down 1.30 percentage points compared to 3Q.

Groupings of GDP components show that personal consumption expenditures (PCE) and government consumption expenditures (GCE) contributed to 4Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. Overall, key line items in this report exhibited material deterioration relative to 3Q. Growth in 4Q consumer spending was less than half that reported in 3Q (although virtually all of the erosion was in spending for goods); growth in fixed investments nearly disappeared, as did growth in governmental spending. Moreover, exports tumbled into outright contraction.

The ongoing slowdown in inventory accumulation exerted less of a drag on GDP growth in 4Q. In 2Q, the value of inventories jumped by +$113.5 billion SAAR; 3Q: +$85.5 billion; 4Q: +$68.6 billion. I.e., the accumulation of inventories slowed GDP growth by -$16.9 billion SAAR in 4Q instead of -$28.0 billion in 3Q. Another “positive” observation (at least given the way GDP growth is computed) was that imports also were less of a drag on the rest of the economy -- although that was the result of both lower oil prices and generally weakening demand (the latter evidenced by real final sales of domestic product falling to less than half of the 3Q estimate). Recall that since imports subtract from GDP, a reduction in imports boosts GDP growth.

For this report the BEA assumed an annualized deflator of 0.82%. During October-December 2015 the inflation rate recorded by the Bureau of Labor Statistics (BLS) in its CPI-U index was 0.47%. Were the BEA's nominal data deflated using 4Q CPI-U inflation rate, the headline GDP growth number would have been a somewhat more optimistic +1.04%. 

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This report should be a “wake-up call” for anyone who thinks the U.S. economy is steaming forward in relative isolation from the rest of the globe:

* The headline growth rate dropped by nearly two-thirds, thanks primarily to much weaker growth in consumer demand for goods and commercial fixed investments.

* Exports fell into significant contraction.

* The sustained growth in consumer spending for services is not discretionary -- it is primarily a consequence of rising Obamacare healthcare costs. In fact nearly one-fourth of the 4Q2014-to-4Q2015 increase in total GDP is attributable to healthcare expenditures.

* The quarter-to-quarter increase in the household savings rate (to 5.4%) goes a long ways towards explaining the ongoing weak retail sales. Household funds not being spent at the gasoline pump or on healthcare premiums are simply being saved. This implies households’ view of the future is not particularly positive.

* Finally, the numbers above show materially weaker economic growth within the United States, after several prior lackluster quarters (2Q2015 being something of an exception, although growth during even that quarter could hardly be described as “stellar” in historical context). There is a downward trend in the numbers that, absent a miracle, points to economic contraction in the near future.

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.

December 2015 Residential Sales, Inventory and Prices

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Sales of new single-family houses in December were at a seasonally adjusted annual rate (SAAR) of 544,000 units (besting the 500,000 units expected), an increase of 53,000 units or 10.8% (±17.1%)* above the revised November rate of 491,000 units. December’s sales activity was also 9.9% (±25.0%)* above the December 2014 SAAR of 495,000 units; the not-seasonally adjusted year-over-year comparison (shown in the table above) was +8.6%. For all of 2015, sales were 13.7% higher than 2014.

For a longer perspective, December sales were roughly 61% below the “bubble” peak and about 27% below the long-term, pre-2000 average. Because sales increased while single-family starts declined, the three-month average ratio of starts to sales fell to 1.50 -- above the average (1.41) since January 1995. It is interesting to note that, despite the December rebound, sales trended lower since February 2015 while starts have trended upward.

Meanwhile, the median price of new homes sold fell by $8,100 (-2.7%), to $288,900 in December. The average price of homes sold tumbled by $17,800 (-4.8%), to $346,400. Even with the outsized decrease in the average price, the proportion of “starter” homes (those priced below $200,000) was the lowest (18.4%) of any December on record (going back to 2002); prior to the Great Recession starter homes comprised as much as a 61% share of total sales.

* 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 December, single-unit completions jumped by 56,000 units (+8.7%). Because the absolute increase in sales was similar in size, new-home inventory expanded in absolute terms (+6,000 units) but shrank in months-of-inventory (-0.4 month) terms. 

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Existing home sales rebounded in December (+700,000 units or 14.7%) to 5.46 million units (SAAR); that result was considerably above expectations of 5.20 million. Inventory of existing homes contracted in both absolute (-250,000 units) and months-of-inventory (-1.2 months) terms -- to near their lowest levels since before the housing crash. Because the increase of existing home sales outpaced that of new sales, the share of total sales comprised of new homes dropped to 9.1%. The median price of previously owned homes sold in December continued higher (+$4,100 or 1.9%), to $224,100. 

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Housing affordability improved marginally in November despite the median price of existing homes for sale rising by $1,000 (+0.4%) to $221,600. Concurrently, Standard & Poor’s reported that the U.S. National Index in the S&P/Case-Shiller Home Price indices posted a not-seasonally adjusted monthly change of +0.1% (+5.3% compared to a year earlier).

“Home prices extended their gains, supported by continued low mortgage rates, tight supplies and an improving labor market,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Sales of existing homes were up 6.5% in 2015 vs. 2014, and the number of homes on the market averaged about a 4.8 months’ supply during the year; both numbers suggest a seller’s market. The consumer portion of the economy is doing well; like housing, automobile sales were quite strong last year. Other parts of the economy are not faring as well. Businesses in the oil and energy sectors are suffering from the 75% drop in oil prices in the last 18 months. Moreover, the strong U.S. dollar is slowing exports. Housing is not large enough to offset all of these weak spots.

“Home prices continue to recover from the collapse that began before the recession of 2007-2009 and continued until 2012. Three cities – Dallas, Denver and Portland OR – have reached new all-time highs; San Francisco is even with its earlier peak and Charlotte NC is less than 1% below its previous peak. The S&P/Case-Shiller National Home Price Index is about 4.8% below the peak it set in July 2006, and 29.2% above the bottom it touched in January 2012. By comparison, the S&P 500 as of Friday, January 22nd is up 46% from January 2012 -- better than the S&P/Case-Shiller National Home Price series and about the same as Los Angeles.” 

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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.

December 2015 Residential Permits, Starts and Completions

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Builders started 1.149 million residential units (SAAR) in December (1.200 million expected). That is 2.5% (±8.6%)* below the revised November estimate of 1.179 million units (originally 1.173 million). The MoM decrease was most obvious in the single-family component. Single-family starts were at a rate of 768,000, or 3.3% (±8.5%)* below the revised November figure of 794,000. Multi-family starts were estimated to be 381,000 units (-4,000 or 1.0%).

* 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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December’s SAAR was 6.4% (±12.2%)* above the year-earlier SAAR of 1,080 million. The not-seasonally adjusted (NSA) YoY comparison (shown in the table above) is +5.6%. Single-family starts were +5.0%; multi-family: +6.7%.

An estimated 1.111 housing units were started in 2015, or 10.8% (±2.9%) above the 2014 figure of 1.003 million starts. Year-to-date (YTD) comparisons ranged between 10.4 and 11.4%. 

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Completions rose by 54,000 units in December, to a SAAR of 1.013 million. That is 5.6% (±10.5%)* above the revised November estimate of 959,000 and 7.9% (±11.6%)* above the year-earlier SAAR of 939,000 units. The NSA estimate was +4.8% YoY.

All of the MoM increase occurred in the single-family component. Single-family completions rose by 56,000 units, to 696,000. That is 8.8% (±12.2%)* above the revised November rate of 640,000 and +5.6% YoY (NSA). Multi-family completions edged down by 0.6%, to 307,000 (but +2.8 YoY NSA).

An estimated 965,700 housing units were completed in 2015, or 9.3% (±3.8%) above the 2014 figure of 883,800. 

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Total permits in December were at a SAAR of 1.232 million units (1.217 million expected). That is 3.9% (±2.2%) below the revised November rate of 1.282 million (originally 1.289 million), but 14.4% (±1.2%) above the year-earlier SAAR estimate of 1.077 million (+17.4% YoY NSA).

All of the MoM decline in permits was concentrated in the multi-family component, as single-family authorizations rose by 13,000 units, to a rate of 740,000 (1.8% ±2.2%* above the revised November figure of 727,000). Multi-family authorizations fell by 11.4% (to 492,000 units).

An estimated 1.173 million residential building permits were issued in 2015, 11.5% (±1.8%) above the year-earlier SAAR of 1.052 million units.

Builder confidence in the market for newly-built single-family homes held steady at 60 in January from a downwardly revised December reading of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index. Any number over 50 indicates that more builders view conditions as “good” than “poor.”

“After eight months hovering in the low 60s, builder sentiment is reflecting that many markets continue to show a gradual improvement, which should bode well for future home sales in the year ahead,” said NAHB Chairman Tom Woods.  “January’s HMI reading is right in line with our forecast of modest growth for housing,” added NAHB Chief Economist David Crowe. “The economic outlook remains promising, as consumers regain confidence and home values increase, which will help the housing market move forward.” 

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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.