The US stock market soared with the Dow Jones average hitting the highest level since December 2007 and in large part has the US energy industry to thank. The catalyst for this impressive milestone was a much better than expected Institute of Supply Management Manufacturing report. Despite some weak regional manufacturing reports the nationwide factory index surged to reading of 54.8 in April up from 53.4 reading from a month earlier. Compare that with Europe where in the UK for example manufacturing index fell more than forecast with a reading of 50.5 just a sliver above the 50% expansion line. In fact the entire Eurozone manufacturing data fell for the ninth month in a row and at the fastest pace in thirteen years hitting 45.9%. A disturbing contraction reading showing the EU is in a manufacturing recession. Even in China where the government uses its currency and fancy accounting to prop up its manufacturing sector, reported an expansion reading of 53.3% on an economy that is supposed to grow at more than an 80% clip.
So why is the US manufacturing sector shinning as compare the EU? Well one reason has to be the historically low natural gas prices. The Impact that new production techniques are having on the manufacturing sector cannot be underestimated. Because of the hard work of this industry and cheap gas this country will create hundreds of thousands of jobs. In Europe where gasoline prices are at record highs and natural gas prices are five times the US price and almost ten times in China. Bloomberg says that the fuel is a particularly critical input for the petrochemical and refining industry, giving U.S. firms a big cost advantage over international competitors, as much as 70 percent over manufacturers in South Korea and Europe. Whether cheap natural gas is propelling any of the strong job growth in the manufacturing sector over the past couple years is debatable. It’s certainly making a lot of manufacturers more profitable.
This fact has unleashed the biggest US manufacturing boom in decades. Take for example the US steel industry. Reuters News reported that, "America’s steel industry, for decades a symbol of industrial decline, is betting on natural gas to make it more competitive against foreign producers. U.S. Steel Corp and Nucor Inc the two largest U.S. steel producers, are changing their traditional manufacturing processes as relatively cheap domestic natural gas supplies become more plentiful. Some experts believe the new techniques will not only allow steelmakers to cut costs and lower selling prices at home, but also give U.S. companies a chance to compete with Japanese, South Korean and European rivals for a slice of the export pie. In the Chemical industry as reported by USA Today there are nearly 30 chemical plants proposed in the U.S. in the next five years, mainly due to cheap natural gas. The projects would expand U.S. petrochemical capacity by 27% and employ 200,000 workers at the factories and related suppliers which is a major turnaround. As U.S. natural gas prices soared in the late 1990s, chemical makers moved overseas, laying off 140,000 employees.
Yet there is some downside of low natural gas prices if you are a producer or if the tax that you collect is based on price. The USA Today reports that some energy-producing states are bracing for lower tax revenue from the plummeting price of natural gas, which is just above half of what some states forecast when they put together budgets for 2013 and beyond. The Energy Information Administration estimates they will be 25% lower this year than in 2008, but crimps states dependent on natural gas taxes. Some are preparing for lower prices for 2013 and 2014 budget years.
Wyoming Gov. Mead, a Republican, was operating on $4 forecasts in December, revised them to $3.25, and last month directed state agencies to prepare for 8% budget cuts in 2014 if prices don't improve by then. Mead says if the price remains around $2 the rest of the current year, the state's receipts could be about $125 million lower than expected.
Wyoming is among a handful of states that have enjoyed rising revenue from the energy boom in recent years. Its two-year state budget has gone from $1.58 billion in 2003-04 to a projected $3.24 billion for 2013-14. The state has used windfalls from energy taxes since 2005 to put an extra $3.3 billion into highways, state construction and aid to local governments.
Wyoming's legislature already has authorized Mead to tap $150 million from a reserve fund if prices don't improve, but he has ordered agencies to plan for future cuts before tapping further into the reserve. In New Mexico it gets one of every six dollars from oil and gas taxes, loses $82 million annually for every $1 drop in the price of natural gas. Finance and Administration Secretary Tom Clifford says, "New Mexico is definitely concerned" but that higher oil prices and production are offsetting the losses, for now. Oklahoma estimated a $3.64 price for its 2013 budget, which begins in July. Every $1 drop in price costs the state roughly $70 million a year, state Treasurer Ken Miller says. Texas, far less dependent on oil and natural gas tax receipts than 20 years ago, has increased production so much that its $1 billion in natural gas revenue from the first seven months of the 2012 fiscal year was 65% higher than last year. Tax receipts from oil production were up 54% and cushioned the lower price of natural gas.
Today the impact of strong manufacturing on oil may be offset somewhat by the rebounding dollar. Oil should stay range bound with an upside bias and will wait for the oil inventory report before making a decisisave move. Look for a bearish surprise on crude inventories. The API reported that crude increased by 2,035 million barrels. Products dumped falling 3.898 million barrels and distillates by 4.176 million. Gas demand is still weak as MasterCard spending Pulse reported it fell by 39,000 barrels per day to 8.649 million barrels per day. The four-week moving average demand figure posted its 58th consecutive year-over-year decline, down 5.2% compared to the similar period last year and the decline was 0.5% larger than reported last week.