A Global Manufacturing Slowdown
It is not just the U.S. that is reporting disappointing manufacturing data. In China and Europe numbers are being released raising worries about the strength of the global economic recovery as well as the future demand for oil.
The Shanghai stock market is rocket hot as the Chinese Purchasing Manager index hits a 10 week low against a back drop of weakening manufacturing data around the globe and the continuing debt crisis in Greece. The pre-release of the China PMI showed that China's Manufacturing growth slowed to a reading of 51.8. That was down from 51.8 the month before and well below market expectations. That weakness also showed up in China's copper imports which fell 48% from a year ago in an ominous sign for near term commodity oil bulls.
Then in Europe the news was disappointing as well. The Euro Zone manufacturing Purchasing Managers' Index fell to 54.8. That was a steep drop from last month's 58.0 in April and well below market expectations of 57.5. These steep drops in manufacturing obviously are not good for oil demand expectations or the reports that Greece is almost out of money again. Greece's downgrade and reports that if they don't get money soon they will indeed default is keeping more downside pressure on oil.
Yet the bright side is gasoline prices are falling down, so we have that going for us. A drop in gas price should accelerate into the holiday weekend. The EIA pointed out in their This Week In Petroleum that, "Disruptions in crude oil supply resulting from unrest in the Middle East and North Africa have been widely recognized as important sources of oil - and in turn gasoline price increases since the beginning of the year. More recently, however, unusually wide gyrations in wholesale gasoline prices have shown that downstream factors closer to consumer markets can also greatly affect prices at the pump. The U.S. Energy Information Administration's (EIA) national average retail pump prices for regular gasoline climbed from $3.07 per gallon at the beginning of this year to a high of $3.97 per gallon on May 9, declining only to $3.96 per gallon this past Monday. Increasing crude oil prices were clearly the dominant driver of higher gasoline prices through much of April. But in recent weeks, unplanned refinery outages and concerns over flooding of the Mississippi River and its impact on refinery production and product distribution have added significantly to wholesale, and subsequently retail, gasoline price pressures in most of the United States. News last week of improved product supplies followed by reports this past weekend of reduced threats to major refinery and distribution systems from opening the Morganza Spillway, caused wholesale gasoline prices to plunge. Retail prices, which lag wholesale price changes, should soon start to reflect that decline."
I agree! Changes in crude oil prices and the gasoline crack spread (difference between spot or wholesale gasoline price and crude oil price) account for most of the fluctuation in gasoline prices, indicating pressures on the upstream and downstream, respectively. Marketing, transportation, retail markups and taxes, the remaining components that make up the pump price, do not vary as much as either crude oil prices or the gasoline crack spread.
But increases in the gasoline crack are usually somewhat predictable, reflecting seasonal shifts in gasoline demand from January into the peak summer driving months. For example, over the 2000 to 2007 period, prior to the recession that affected gasoline markets in recent years, the Gulf Coast gasoline crack increased about $7.50 per barrel from January to April, or about 18 cents per gallon. Variations in the crack around national or regional norms often arise from local supply or demand variations.
In the last few weeks, however, the average Gulf Coast gasoline crack has increased steeply. Unusual inter-regional variations have also occurred. While gasoline cracks for much of 2011 to date were below average and even negative at times, they began climbing back and rose sharply towards the end of April. Volatility will remain high but oil appears to be in a choppy downtrend that targets near $85.00 a barrel basis the front month.
Oil, which has topped for the time being, will more than likely be in a sell the strong rally mode until the 4th of July barring war in the Middle East or a bad hurricane season or any other unforeseen event. Short term we should see wide swings so there will be opportunities for both the long and short side of the market, however we continue to stay bearish until mid summer. Perhaps after QE2 ends or if Europe raises rates in July we could then bottom, yet near term the fundamentals favor lower prices at this time.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
