0 Jul 28 @ 10:58am by Matt Smith in Capital Markets, Crude Oil, Economy, Global Energy, Natural Gas

Let’s Face The Music

At a time when we approach the unprecedented potential of a default by the US on its national debt, it is worth acknowledging that there may well be trouble ahead (…and imminently). As we face the music and prepare to lace up our dancing shoes,  it seems prudent to remember where we were a year ago, and then appraise whether current downbeat perceptions are muddying the water. So from the starting point of Energyland™ to the general economy, let’s take a look at ten reference points, to see if we need to throw in the towel, or just throw some shapes: 

1) The US unemployment rate is currently 9.2% (vs. 9.5% at the same time last year). That said, the labor force participation rate is at 64.1%, its lowest level since March 1984 (when Jump by Van Halen spent the majority of the month as Billboard #1). The low participation rate is because people are so disenchanted they are dropping out of the jobs pool. Not good.

2) US gasoline demand is down 3.3% on the same four-week period as last year – not that encouraging. However, the national average retail price explains some of this weakness away, as it is currently $3.70/gal, compared to $2.74/gal last year: demand destruction in action.

3) Core Inflation is at +1.6% year-on-year (vs. +0.9% for this time last year). It is bouncing from the low of +0.6% last October, which is its lowest level seen since October 1965 (when Yesterday by The Beatles spent the majority of the month as Billboard #1). Inflation including food and energy highlights how rising commodity prices are having the biggest impact on inflation, with it currently at +3.6% year-on-year.

4) Global energy prices: European prompt month coal is up 35% (…South African up 35%… Australian up 26%), WTI crude oil is up 25%, Brent crude oil is up……54%.

5) US natural gas industrial demand: According to Bentek, although total demand for natural gas is on average 1 Bcf/d higher so far in 2011 year-to-date versus the same period last year, industrial demand is down 0.2 Bcf/d. Although this decline may be partially explained away by increased energy efficiency, it highlights the industrial sector is not going gangbusters (see 10).

6) Stock markets: The MSCI world equity index is up 17% over the last year, as is the S&P 500. Europe (DJ EuroStoxx 50) is down 2% (Euro debt problems and lackluster growth are taking their toll apparently), while China is up a moderate 5%.

7) Natural gas pricing: UK prompt month pricing is up 34% (…due to potential LNG displacement as a result of the Japanese earthquake, also back under the influence of crude pricing), while US pricing is down 6% (..due to near-record production levels as shale plays ramp up). 

Brent crude (black), S&P500 (red), coal (blue), UK natgas (green), Jan 2010 - present

8) The Housing Market: According to the National Association of Realtors, the average price of an existing home is now $236, 200 versus $230,000 last June, while the S&P/CaseShiller housing index says house prices are down 4.5% versus the previous May. Which one you want to believe depends on whether you are trying to buy or sell a house; all we know is that housing has been in a secular bear market since 2006, and is near to its end. Although it may not be there yet.

9) Global oil demand: According to the IEA, global oil demand averaged 87.4 mb/d in Q2 of last year, while this year it was 88.2 mb/d.

10) Global Manufacturing Sector: on the upside, the key regions of the US, Europe, China, and Japan, are all showing expanding manufacturing sectors. On the downside, no region is showing a faster rate of expansion versus last year.

So where does this leave us? In a nutshell: a mottled economic environment in the US, while global commodity prices rise. Yes, unemployment is falling, but at the expense of people leaving the job pool; the housing market remains depressed, although we must be nearing the end of the bear market soon (after over half a decade).

Inflation remains contained, although rising commodity costs are trying to usurp this, while the manufacturing industry continues to expand, albeit at a slow pace. At least low natural gas prices in the US are providing some relief. But as global commodity prices and data highlight, there is increasing demand for commodities due to economic strength..but from emerging markets and not the US.

The best we can hope for is a return to strength in housing, employment, and manufacturing in the US, while commodity prices stay in check enough not to derail the global economy.

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