EUROPE’s gas storage is filling at the fastest rate on record, and now holds above-average volumes, as utilities try to accumulate inventories ahead of a possible shut off of imports from Russia next winter, and high prices attract heavy LNG inflows away from Asia while discouraging industrial consumption:
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U.S. PETROLEUM inventories depleted by -5 million bbl to 1,686 million bbl last week. Stocks have fallen in 73 of the last 99 weeks by a total of -432 million bbl since the start of July 2020:
U.S. DISTILLATE inventories increased by +2 million bbl to 107 million bbl last week – the second consecutive weekly increase. Stocks have probably reached their seasonal low and are rising as normal at this point of the year as refineries boost crude processing to make more gasoline. But they are still at the lowest seasonal level for more than 15 years:
U.S. DISTILLATE inventories on the East Coast (PADD 1), where shortages have been most acute, fell by another -1 million bbl to 22 million bbl last week:
U.S. GASOLINE inventories fell -0.5 million bbl to 220 million bbl last week – the lowest seasonal level since 2014:
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CATERPILLAR is the world’s largest maker of equipment for the construction and mining sectors, as well as a range of transportation equipment. Caterpillar is a bellwether for heavy industry and its share price is closely correlated with the business cycle. The company’s share price has fallen by almost -15% compared with the same month last year, a decline that suggests a slowdown is already underway:
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Fuel tax cuts are poor response to high prices ($BBG)
BRENT’s six-month calendar spread has increased to a backwardation of more than $13 per barrel, up from just $3 in early April, as traders anticipate planned EU sanctions on Russia’s petroleum exports will intensify the global shortage of crude oil and refined products:
U.S. RIG COUNT rose by +14 to 728 last week, with the addition of +13 rigs targeting oil-rich rock formations and +1 rig targeting predominantly gas-rich rock. The number of rigs drilling for oil has risen by +404 from its cyclical low in August 2020 but is still -107 below the pre-pandemic level:
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U.S. PETROLEUM inventories including the strategic petroleum reserve depleted by another 8 million bbl to 1,691 million bbl last week. Inventories have depleted in 72 of the last 98 weeks by a total of 426 million bbl since the start of July 2020. The persistent shortage of oil is putting intense upward pressure on prices:
U.S. GASOLINE stocks fell by 5 million bbl to 220 million bbl in the week to May 13. Inventories have fallen for 14 of the last 15 weeks by a total of 30 million bbl and are now at the lowest for the time of year since 2014:
U.S S&P 500 equity index has fallen by 7% compared with the same period a year ago, and is down by 15% in real terms, as investors anticipate an imminent business cycle slowdown:
U.K. INFLATION has accelerated to 9%, the fastest rate since 1982 and one of the most significant price shocks since the Second World War:
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U.S. FINANCIAL CONDITIONS for households and businesses wanting to borrow or raise capital tightened again last week and are the most restrictive since the first wave of the pandemic in 2020 and before that 2012:
U.S. INFLATION is becoming more deeply embedded in the economy with service sector prices climbing at an annualised rate of almost 8% over the last three months, the fastest increase since 1990 and before that 1982.
Some commentators have dismissed the increase inflationary pressure as a problem of supply bottlenecks rather than too much demand. Separating the supply side and demand side this way is an analytical error. Insufficient supply is the same as excess demand and vice versa.
But the data also shows inflationary pressures have spread from the energy- and raw materials-intensive merchandise sector to the labour-heavy services sector. Rapid service sector price increases usually signal the imminent arrival of a recession:
BUSINESS CYCLE turning points and phase transitions are hard to spot in advance or in real time in the official statistics because most data is published with a lag of 1-3 months. Latency in the statistical system conceals the much more rapid change in business conditions. But it may be possible to detect mid-cycle slowdowns and end-of-cycle recessions much closer to real time by focusing on the behaviour of key companies.
In presidential address to the American Economic Association in 2017, economist Robert Shiller characterised a recession as “a time when many people have decided to spend less, to make do for now with that old furniture instead of buying new, or to postpone starting a new business, to postpone hiring new help in an existing business.”
Decisions to reduce spending, postpone expensive purchases, defer or freeze hiring are all indicators of a potential slowdown. Sometimes the reasons will be company or household specific. But if there are enough companies and households behaving in the way the likelihood of an imminent slowdown is much higher.
In that context, these recent news headlines are all indications economic momentum is slowing:
“Uber to cut back on spending, treat hiring as a privilege” (Wall Street Journal, May 9)
“Twitter freezes hiring as two senior executives leave the company” (Wall Street Journal, May 12)
“Amazon’s net loss prompts query: has it built too many warehouses?” (Reuters, April 29)
This is not conclusive proof the major economies are entering a slowdown, and it cannot show whether it will be a mid-cycle soft patch or something deeper that qualifies as a recession, but the headlines are strongly suggestive pattern.
CHINA generated a record 221 TWh of hydro electricity in the first three months of the year, up from 196 TWh in the same period in 2021, relieving pressure on coal and gas inventories and prices:
U.S. EQUITY PRICES signal investors expect an imminent business cyclical slowdown – either a mid-cycle soft patch or an end-of-cycle recession. The S&P 500 index is down by almost 5% compared with the end of May 2021 and down by more than 11% in real terms:
INDIA’s temperatures have fallen over the last week and are closer to the seasonal average, reducing electricity consumption slightly and easing stress on the power grid. The grid’s frequency has moved closer to the 50 Hz target and periods of under-frequency have become shorter and less severe, showing a closer balance between generation and demand:
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DISTILLATESHORTAGES are pulling up crude spot prices and calendar spreads as refiners maximise crude processing to meet demand for freight and manufacturing fuel:
U.S. FINANCIAL CONDITIONS are tightening rapidly as investors and intermediaries anticipate higher interest rates and a slowing economy. The Federal Reserve Bank of Chicago’s national financial conditions index – derived from 105 indicators covering risk, credit and leverage – shows conditions are the tightest since the first wave of the pandemic in 2020, and before that 2016 and 2012. The adjusted index, which attempts to isolate purely financial rather than real-economy factors, is the tightest since 2020 and before that 2011:
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BRENT spot prices and calendar spreads are climbing as traders anticipate an EU embargo will disrupt Russia’s oil production and reduce supplies available globally. Brent’s six-month calendar spread is trading in a backwardation of more than $10 per barrel again, notwithstanding the ongoing release of emergency stocks by the United States and other members of the IEA. Brent futures for deliveries in Dec 2022, when the release will have been completed, are trading at $102, not far below the peak of $104 in early March during the initial shock after Russia’s invasion of Ukraine:
U.S. PETROLEUM inventories including the strategic petroleum reserve fell by -0.5 million bbl to 1,696 million bbl last week. Distillate stocks fell -2 million bbl to 105 million bbl. Global consumption is running consistently faster than production causing inventory depletion and upward pressure on prices:
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