Con-tango

A slowdown, not

The surprise fall in the trade deficit (to $62 billion, as reported last week by the BEA); was taken quite harshly by the markets, and in
particular commodities where prices fell sharply –the
consensus explanation: lower oil imports meant a falling
US demand.

My curiosity was piqued by FTX reneging  Brad Setser’s lower oil imports to explain a wishful
declining demand and correcting US trade deficit…

Here is Brad’s account of the oil impact:

And the deficit improved because of an unusual fall off in imports.

Non-oil goods imports did not bounce back strongly from their February
total of $125.3b (s.a.). March exports were $126b. I had expected a
higher number, something a bit closer to the (high) January number of
$130.3b. I
wonder a bit about the seasonal adjustment – overall goods imports (not
seasonally adjusted) were $154.2b in March, v $136.3b in February.

But the main reason for the better-than-expected deficit: oil

That’s right.  Oil.  Oil imports fell.

Seasonally adjusted petroleum imports fell by about $2 billion in March. Seasonally
adjusted imports of “industrial supplies” – a category that includes
crude oil, gas and host of other raw materials – fell by $3.3b.  I thought commodity prices were going up and up …

Some of it may be that the seasonal adjustment is a bit off.

But not all of it.

 

I always like to look at
Exhibit 17 of the trade report. It is the data on oil imports in its
rawest form. And it turns out that the US imported less oil this March
than last March: 397,983 thousand barrels v. 420,260 thousand
barrels. And
the US imported less oil in the first quarter of 2006 than in the first
quarter of 2005: 1,192,492 thousand barrels v 1,226,459 thousand
barrels. For the quarter, that is a fall of 2.75%.

Maybe higher prices are having an impact.

That is the good news. The bad news: the March import
price of $52.26 a barrel (a bit below February) is not going to
last. And I hope that inventories were high despite the fall off in
imports … otherwise, April isn’t going to be pretty.

and FTX’s reply:

I don’t think oil is the reason.

Crude oil imports were down
year-on-year, but total petroleum imports were up. The EIA’s status
report for w/e 3/31/06 shows the 4 week average of crude oil supply was
9.810 mbd vs 9.999 mbd in 2005. But finished product petroleum imports
were 2.081 mbd vs 1.504 mbd in 2005.

This makes sense when you
consider that refining capacity has been constrained and so the crude
can’t be processed. The US has had to import finished gasoline and
other products instead.

Exhibit 9 in the trade release appears to confirm this. March petroleum imports were $22.53b vs $18.62b in 2005.

Last week the US imported on average 1.6 million barrels per day of finished gasoline, the highest weekly average ever.

Written by FTX on 2006-05-12 13:32:38

and

Ah, okay, I see your point re the improvement over Feb. Petroleum imports in Mar 2006 were $2b less than in Feb 2006.

Remember
that during March, gasoline and fuel stocks fell sharply which prompted
worries over supplies. So what we had was really a drawdown on stocks
rather than a reduction in demand.

Gasoline demand has not
suffered because of higher prices, which is why traders pushed the
price up this week despite a higher-than-forecast increase in gasoline
stocks. I believe you’re correct in thinking this is a temporary
reprieve on petroleum, not the beginnings of a turnaround.

Written by FTX on 2006-05-12 13:59:26

Unfortunately,
the following EIA charts show that the decline in oil imports was
effectively due to drawdowns in gasoline as well as distillate
inventories; which would explain away the $2+ billion USD March oil
import reduction.

The gasoline inventory was reduced approximately by 25 million barrels; which at $52.26 totals $1.30 billion USD:

Source: EIA The Week in Petroleum; Gasoline Section

And the distillate inventory was reduced approximately by 20 million
barrels; which at $60.50 (approx. from the BEA tables) totals $1.21
billion USD:

Source: EIA The Week in Petroleum; Distillate Section

Considering reasonable average oil exports, we come to the conclusion
that there was no demand slack, oil products were taken from the
inventory shelves.

Now, why would this happen this March?

Could it be that the refineries are getting cautious in their oil purchases anticipating a possible deceleration in demand?

Or, was it a plain and simple early stalling attempt to cause oil
supplier panic selling to head off the coming hike in summer prices due
to increased demand?

I’m inclined to believe the second explanation is true.

Although the commodity markets are frothy, 25 year highs in most
commodities; excluding the suspects like gold and silver, copper just
yesterday had a reduction in inventories, and its LME inventory is at a
2-3 day level.

Source: KITCO

The USD weakness adds further weight to the argument that
commodities are in a correction phase, probably due to profit taking,
and the obvious volatility associated with the extreme levels of prices
achieved.

Copper demand is extremely well correlated with world GDP growth, and
an increase in copper inventories is usually an early warning to an
impending decelaration of demand.

As a matter of fact, it signals an oil price drop with a month in advance.

So, be careful, prices have reached dizzying heights; but,
fundamentals say there’s still room for additional profits from a long
position.

And, I didn’t even mention China…