OIl, consumer spending, and the Recession

Back in April, I crunched retail and oil price numbers and concluded that the price of oil was responsible for over half of the changes in real retail spending in the last two years. As the price of oil continued to shoot higher, on June 2, after examining the role of China's hoarding in its burgeoning strategic oil reserve, and the hoarding going on at sea by oil companies and speculators, I wrote that

there is hoarding going on. There is a tremendous speculative boom again in commodities, and it will just as surely bust. On that score, Frontline's latest weekly report from May 29 notes that "In the Atlantic, VL rates are flat as well, but tonnage availability is on the rise as floating storage vessels return to trading." How high prices will get before the bust, I can't say. Except just as I did last year, I will say that the longer Oil prices go above $80, the deeper the pain to American consumers, and the bigger the hit the economy will take.

Indeed, the price of Oil reached as high as $73.90 in early June, before falling over $10 to $62.93 yesterday. The price of gasoline tends to peak during the summer driving season, as shown on this graph:

and the ensuing decline has caused the Department of Energy to wonder if we have already passed this summer's peak gasoline prices.

The dynamics of the market started changing the day after my last post. First of all, China, as confirmed by Stratfor stopped its purchasing binge of all commodities, and specifically for Oil:

China, the world's second-biggest energy consumer, won't buy more oil for stockpiling until additional storage tanks are built, a government official said. Until the second phase of the country's emergency oil reserves is constructed, there will be no additional purchases for stockpiling, Zeng Yachuan, deputy director-general of the policies and laws department at the National Energy Administration, told reporters at the Zhenhai facility in the coastal province of Zhejiang today.

As noted in my last post, because so many oil tankers were being used for storage, owners of those tankers raised prices on them, which added considerably to the storage costs of speculators. With futures prices on the Nymex hovering at under $75 for futures out till December 2010, the profit in storing oil on the high seas disappeared. As a result, speculators started to bring their tankers to shore and unload their cargoes as noted in this article from June 26:

Oil traders are relying on an unwitting ally, OPEC, to help them quietly exit what experts say is one of their most lucrative gambits ever -- storing vast oil supplies at sea to sell later for profit.

Trading firms like Koch KCHIN.UL and Vitol have sold millions of barrels from supertankers into the United States over the past month to cash in after crude prices doubled since winter, tanker brokers told Reuters.

The oil sold ashore has gone almost unnoticed, offset by output cuts by the Organization of the Petroleum Exporting Countries that allowed traders to unload tankers without causing a tsunami of U.S. oil imports that would crash prices.

With China withdrawing extra demand, and storage no longer feasible, the price dropped -- over 15% within the last month. As of today, November 2009 futures stood at $64.82, and December 2010 futures at $71.17.

As noted in my previous posts, the price of oil is a very important determinant of consumer spending. For example,

The Commerce Department reported that retail sales rose a seasonally adjusted 0.5 percent in May from a month earlier, after falling the two previous months. The monthly increase indicated that consumer spending was creeping higher as gas prices rose and the economy’s declines began to level off.

It’s price-driven,” said Ryan Sweet, senior economist at Moody’s Economy.com. “Consumers are prioritizing, focusing their spending on necessities. If gasoline prices continue to climb, their purchasing power will take a big hit.” ....

Sales at gasoline stations, though 33.8 percent lower than the previous May, rose 3.6 percent from April. Gasoline prices have risen to a nationwide average of $2.63 a gallon as crude oil prices rise, driven higher by signals that the recession’s worst days may be over and by concerns about inflation in the future.

In other words, purchasing gasoline takes money that consumers would otherwise use to purchase other goods:

"People say it doesn't matter until gas gets to $3 or $4 a gallon," said Peter Beutel, an oil analyst at Cameron Hanover. "But every time it goes higher it takes that much more money out of consumers pockets."
Beutel can even tell you how much. For every 10 cent rise in gas price, people can spend $40 million less a day on other things.

Some of this redirection of spending appears to have shown up very clearly in recent Shoppertrak data (the month of June hasn't been calculated yet, but the weekly numbers have been in line with May's):

Month YoY % Change
5/09 (-13.8%)
4/09 (-10.1%)
3/09 (-5.0%)
2/09 (-1.5%)
1/09 (-3.8%)
12/08 (-4.5%)
11/08 (-4.3%)
10/08 (-1.4%)
9/08 (-2.0%)
8/08 (+3.5%)

Some of the decline in April and May may be due to consumers shifting away from malls (where Shoppertrak mainly measures) to more downmarket stores like Kohls, Target, and Costco. But some undoubtedly has come from the increases necessary to fill gas tanks.

Of course, the recent reversal in the oil market can set up the reverse dynamic as well. Bassoe's most recent oil tanker report indicates that tanker owners have had to lower leasing prices as many of the tankers are idle again. Should Oil decline to $50 or lower, the storage trade will once again become quite profitable, and will reappear -- possibly after a panicky selloff as occurred late last year. In the interim, any relief to the consumer wallet as the result of lower gas prices will be a blessing.

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oil speculators

Have you been following this move on regulating oil speculators?.

The Commodity Futures Trading Commission said Tuesday it is considering imposing volume limits on energy futures trading investors who have purely financial motives, representing a major change by the Obama administration away from the hands-off policies of the preceding Bush White House, The New York Times reported.

The newspaper said the CFTC has already put in place tougher information requirements meant to identify the role played by hedge funds and traders who swap oil futures contracts outside of regulated exchanges.

"My firm belief is that we must aggressively use all existing authorities to ensure market integrity," Gary Gensler, chairman of the commission, said in a statement. The Times said Gensler indicated the CFTC would also consider imposing federal "speculative limits" on futures contracts for energy products.

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Cause & Effect - Taibbi-style

Interesting to note that since the Goldman Sachs trading software theft of about a month ago just came to light, the price of oil began declining (concurrent with GS's drop from the top machine traders on the equity and commodity platforms) - Gee whiz.....could there possibly be a connection?

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rogue oil trader

PVM oil brokerage had a rogue trader for one but there is much mention of oil futures, speculators being like a casino.

I wouldn't make a connection between stolen software to markets until that can be proved. Many of us on EP have tech backgrounds so whip out the intel and we'll help chase it down but we just do not know any of that, if the code was even used as an example.

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Inference based upon the empirecal

True, I am making an inference here, but I left out the portion that GS wasn't on the chart of top machine traders on NYSE the other week - a position where they've held the number one position for quite some time.

But when one goes back and reviews the upticks in oil prices and GS's trading on InterContinental Exchange (which they, along with Morgan Stanley and the oil cartel own), simple arithmetic reveals the obvious trends.

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anyone following this software theft, GS story?

There is one wild diary on DK which implies pure software manipulation if I'm reading this right.

GS flushed Quant Trading.

h/t yellowdog

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Intercepting trades preemptively

If I understand correctly, GS was able to intercept trades before the trade registered with the NYSE - and then GS was able to buy or sell accordingly - before the intercepted trade was completed.

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oh man

that's brazenly criminal if true.

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Argh

The Commodity Futures Trading Commission said Tuesday it is considering imposing volume limits on energy futures trading investors who have purely financial motives

 

You've got to be kidding me.  What else could there be for speculators than financial motive???  Also, NYMEX and ICE already have position limits, so the CFTC really is over stepping it.  If they proceed to place this kind of pressure, traders will go elsewhere, and then you will lose transparancy. As for the volitility of the price of crude, as noted by Messrs Brown and Sarkozy in that inane op-ed in the Wall Street Journal yesterday, well that's the nature of the beast.  

 

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I think this tells two things

1. futures speculation did create commodity bubbles, hence the acknowledgment, which as I understand it, NDD and even Paul Krugman seem to be implying that cannot be done due to the requirement of physical supply somewhere, yet we have extensive testimony before congress that it is done and the details on how it all works

2. they are trying to separate out the commodity futures traders like energy suppliers, who play the markets extensively trying to stabilize their own retail prices, supply vs. hedge funds.

I wrote up a few posts on this almost a year ago, but now I'm just not up on the latest to understand what's going on to date. Sure does seem like a strange wide brush to use in order to solve a problem.

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well, in the energy market

I might suspect grants to fund research as not having financial motivations....oh yeah, the market can't work that way, right?

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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.