Tuesday, October 21, 2014

Get Ready For The Return of $3 Diesel (and $2.60 gas)

How low can you go .......?

After several years of stability there is now a major shake up to fuel prices. Crude oil prices are falling like a rock. Currently at $86/Barrel (or down a $1 since I started gathering notes for this post, which means I have to type faster. Original posted 10/15)  This is down from the June average of $105.

The main reason for the drop is falling world demand.  The economies of Germany, China, Japan and Brazil are all experiencing weakness.  The U.S. would seem to be the only economic superpower with any momentum. 

Another big factor is the increase in U.S. crude production.  While natural gas gets all the headlines, fracking has also freed up vast reserves of crude oil.  So you have conditions of decreased demand and increased supply, leading to a large oversupply of oil.  I don’t have to draw you a graph on this one.

The forecasts are for crude to drop to $76/Barrel.  At that point you will see $3/gallon diesel coming soon to a truck stop near you.  This would further pump up the trucking industry and be a positive for carriers and shippers alike. (Industry people claim fuel surcharges don’t recoup all the additional costs)

Gasoline costs have already dipped below $3 in many parts of the country. $76 crude would result in pump prices around $2.60.  This is a big deal because gas prices act like a tax on consumer spending. Cullen Roche of Pragmatic Capitalism estimates that for every $10 change in crude prices, consumer spending is impacted by $25 billion.  So a drop from $105 to $76 would infuse billions of dollars ($70 billion annual rate) into the economy right before the holidays.  Merry Christmas indeed.

And don’t give any credence to those articles claiming that lower crude prices are “not always a good thing”.  Yes there are some negatives, but $70 billion additional spending annually is a great thing, period. 

$3/gallon diesel prices would negatively impact the conversion to natural-gas powered vehicles (NGPV).  Sales of NGPV Class 8 trucks had slowed this summer due to the new higher efficiency diesel engines elongating the payback period of NGPV. And this was at $4/gallon diesel.  At $3, who is going to buy one?  Who knows what other industries will be impacted by lower crude prices?  This turn of events may have even fracked up the natural gas market in the short-term.

Crude is how low?!!!!!!!
More importantly, crude prices may not stop at $76/barrel. Reportedly, Saudi Arabia is running around slashing prices to customers like a used car salesman.  Iran and Iraq are also doing the same thing while maintaining production levels.  This is not the Arab Spring, but the Arab Spring-A-Leak.  This could result in the end of OPEC as we know it. 

It was assumed that OPEC’s ability to control prices would diminish over time as U.S. and other countries increased production, but like other world events, it could happen much sooner than expected.  

What is the free market price of a barrel of crude? No one knows because it has been a long time since the market was “free”.  How low can it go? Well, we may get a chance to find out and the price may be ludicrous.

This post first appeared (slightly different version) on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Tuesday, October 7, 2014

Confidence In The Economy Is Gaining Steam

The Great Recession produced great fear, and this fear generated economic anxiety that has persisted long after the recession ended.  It has taken years for the trauma to fade, but now in the trucking industry confidence is overcoming the anxiety.

The Reasons for This Confidence:

·       The economy is not falling back into recession
·       The economy continues to grow
·       Freight is growing at a steady pace
·       Fleet profits are growing due to freight growth and a manageable cost environment
·       Reduced uncertainty, which includes knowing the impact of Hours-of-Service regulations and the better than expected performance of the new engines.

The increase in confidence in the trucking industry began last December, and it appears this confidence is starting to spread to the general economy as recent GDP forecasts are improving.

Let’s look at what the latest numbers on economic confidence are telling us:

The Conference Board Consumer Confidence Index

Down to 86 from 93.4 in August - this index was at around 110 before the recession and fell to below 30 in 2009.

This index fell significantly after rising four straight months.  This is probably due to geopolitical tensions including the resumption of military action in Iraq. However, part of the decrease is attributed to a perceived mild softening of the job market.

Thomson Reuters/Univ. Michigan Consumer Sentiment Index

Up to 84.6 from 82.5 in August vs. 77.5 in September 2013 – this index peaked at 98 before the recession and bottomed out below 60.

This index rose based on positive outlooks for the economy and expected growth in personal income.  Consumers anticipate modest job growth in the next year.

Bloomberg Consumer Comfort Index

Down to 35.5 from 37.2 last week, but up over 2% from last year. This index was around 50 before the recession and bottomed out at 21. 

This index fell to its lowest point since early June.  It is attributed to “negative views of the national economy,” and that sub-index fell to its lowest point since May.  Since most economic news of late has been positive, it can be assumed the decline was caused by factors in the Middle East. The personal finances and buying climate sub-indexes held up better.

Moody’s Analytics –Survey of Business Confidence (World)
Down to 34.4 from 35.5 last week

This survey found business confidence is very strong in the U.S., near record highs.  There is strong confidence across all industries, especially in real estate and manufacturing.  Expected employment gains in this survey have never been stronger.

The Conference Board Measure of CEO Confidence

Q2 – Down to 62 from 63 (Readings above 50 points reflect positive attitudes.)

CEOs remain positive in their outlook for 2014; however, the strength of their confidence is starting to level off.  A large majority of respondents expect higher profits this year.

National Federation of Independent Business Optimism Index

August index at 96.1 from 95.7, the second highest reading since October 2007.

Small business owners are remaining cautious.  Hiring plans have flattened out, and they do not expect sales to increase much the rest of the year.  They are also not expecting to increase capital spending or increase inventories substantially.

What It Means

Consumers continue to feel better about economic conditions.  You can see the impact of the recent military actions on the data.  It can be assumed the Reuters/ U Michigan data was collected before the other two indexes and was not influenced by the geopolitical news.  This means the October readings should be more positive.  In general, growing consumer confidence translates into future retail sales.  Therefore, we can expect the consumer segment of the economy to remain healthy.
Rail freight is also very strong right now!

The business sector also looks to be in good shape.  Spending and hiring should continue to improve.  Because pullbacks in this sector are often the first signs of recession, there is little chance of a significant dip in the next 12 months.    

However, it is interesting to note that small businesses are much more cautious and less optimistic than big businesses.  This is consistent with what we have seen in the commercial vehicle markets.  The large fleets started buying early and more aggressively.  Then the medium-sized fleets joined the party, and finally, the smaller fleets are buying more trucks and trailers.  Likewise, the medium-duty trucks, which are used primarily by small business, are still not seeing the sales increases you would expect in this economic recovery.

This post first appeared (slightly different version) on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)