Thawed Out
Commodities are on fire as the economy in the U.S. leads the world in a commodity consuming growth period. Lumber surged to all-time highs and industrial metals are strong as manufacturing and factory growth around the globe is strong. Oil prices are pulling back after a rise in the rig count even though it’s making up for lost time after the big freeze down south.
Baker Hughes Inc .reported that the U.S. oil-rig count increased by 12 rigs in the week ending January 19, bringing the total to 759, the highest since August. While some use the rig count generally as a proxy for activity in the sector, more rigs don’t necessarily tell you exactly how much oil production we may see. Many people believe that there is a linear relationship between the number of rigs and future oil production, yet as we said before that is not the case.
Bloomberg News reports when it comes to rig counts the rig counts no longer are enough to estimate U.S. production. Forecasters look at everything from sand use to hiring stats. U.S. shale drillers who have seen prices climb almost 50 percent in six months, it’s been largely a rig-less recovery, a conundrum for traders seeking to forecast the future. Normally, you’d expect the rigs to return to the field in significant numbers as producer’s flush with added cash looked to boost output. But the weekly Baker Hughes tally has stayed remarkably still. The reason: explorers are doing more with less, forcing traders to use a bigger toolbox of stats, metrics and gauges to track U.S. production that’s expected to top 10 million barrels a day as the year progresses. That includes everything from producer spending surveys to oilfield hiring reports, and even demand for the tiny grains of sand that prop open oil-bearing cracks.
"A well that comes online in U.S. onshore today is dramatically different than one that came on five or 10 years ago," Leo Mariani, an analyst who covers explorers and producers at NatAlliance Securities, said in a phone interview. "It’s just a different animal." For the market, that means the country that’s become the world’s swing producer and a thorn in OPEC’s side is becoming a whole lot harder to read. A must read.
Oil supply could rise this week and break the record breaking streaks of 10 draws in a row. Winter weather slowed refiners in the south that had to go in circulation mode and slowed output along with the maintenance season starting to get underway. Still, we will get another draw in the NYMEX delivery point and that will keep the oil market supported.
Distillate demand should see some records broken. Demand should rise due to a combination of cold weather, strong transportation demand, as well as factory demand. John Kemp, at Reuters, writes that “freight movements in the United States and around the rest of the world are growing at some of the fastest rates this decade, which should provide a big boost for diesel consumption in 2018. In the United States, the volume of freight moved by road, rail, pipeline, barge and air between September and November was around 6 percent higher than in the same period a year earlier.” Freight volumes are growing at some of the fastest rates since 2011, according to the freight transportation services index compiled by the U.S. Bureau of Transportation Statistics. Freight movements are being driven by an increase in coal deliveries to power plants, as well as increases in oil and gas drilling.
U.S. businesses have also finally managed to get their inventories of raw materials, unfinished work-in-progress and finished items under control.
The ratio of inventories to sales has fallen to 1.33, down from a peak of 1.46 in April 2016, and the lowest for three years, according to the U.S. Census Bureau. The continued draw down in inventories is unsustainable and has left manufacturers, distributors and retailers boosting new orders to stop the erosion of their stock levels. One result is a nationwide shortage of trucks and a scramble by shippers to secure enough freight capacity. Freight rates and shipment backlogs have been rising sharply as spare capacity inherited from the slowdown in cargo movements in 2015 and 2016 is used up. The pattern is being repeated worldwide, with global trade growing at the fastest rate since 2011, according to the Netherlands Bureau of Economic Policy Analysis. The global economy is experiencing the strongest synchronised growth since the start of the decade with all the advanced economies in a cyclical upswing.
The rise in oil and other raw materials prices is also starting to produce an upswing in the commodity-dependent developing countries that were hit hardest when commodities prices started tumbling in 2014. The current global expansion is expected to continue throughout 2018 and into 2019 which should support further rapid growth in freight volumes. Since almost all freight is moved by trucks, railroads, barges, ships and aircraft that use diesel or jet fuel made from middle distillates, the economic expansion should provide a big boost for distillate demand in 2018. Distillate consumption tends to be correlated with freight and industrial production so it was hit badly by the slowdown in 2015 and 2016. But distillates are set to be the big beneficiary of the current global upturn, with diesel and jet taking over from gasoline as the fastest-growing source of fuel consumption in 2017 and 2018.
Natural gas is getting more support on old man winter. Last week’s bullish 288 Bcf withdrawal, the second highest withdrawal on record will be followed by a modest 90 bcf withdraw. The bulls though will point to the fact that storage deficit is 18% below the five-year average and that a surplus of 400 Bcf to the five-year average back in March has turned into a deficit of 486 Bcf today. Bears say it does not matter because record U.S. production makes storage levels a moot point. Yet, if we see the polar vortex settle in again, the bulls will have another shot.