Economic Previews

 

 

U.S. vehicle sales expected to edge higher with sharp drop in gasoline prices in January — The market is expecting today’s Jan total vehicle sales report to edge higher to 17.30 million units from 17.22 million units in December.  U.S. total vehicle sales posted a 10-1/2 year high of 18.12 million units in Oct 2015 but then fell by a total of -5.0% to 17.22 million units by December.  

The strength in vehicle sales in 2015 was driven almost completely by strong truck sales sparked by sharply lower gasoline prices.  U.S. truck sales hit a 10-1/2 year high of 10.52 million units in Nov 2015 but then fell by -4.2% to 10.08 million units in December.  Still, the Dec truck sales level was up sharply by +12.6% from the year-earlier level.  Meanwhile, passenger car sales fell sharply by -8.2% in Nov/Dec to post a 3-1/3 year low of 7.14 million units and car sales in Dec were sharply lower by -9.0% y/y.  The weakness in car sales in Nov/Dec suggested consumer caution and had negative implications for the U.S. economy.

Nevertheless, the good news for vehicle sales is that gasoline prices fell sharply in January and may have driven more potential buyers into showrooms to buy both new cars and trucks, leading to the expected pick-up in vehicle sales in January.  Retail regular gasoline prices fell sharply by -8.7% in January to a 7-year low of $1.822 per gallon, according to the American Automobile Association.

 

Chinese stock market on Monday closes moderately lower after mixed PMI figures — The Shanghai Composite Index on Monday closed -1.78% lower, giving back part of last Friday’s +3.09% rally, due to the mixed Chinese PMI reports released on Sunday night.  The Shanghai index on Monday was able to remain above last Wednesday’s 14-month low.  However, the Chinese stock market remains vulnerable to further losses since the Chinese economy has yet to show signs of stabilizing and regaining some upward momentum.

On a positive note in Sunday’s PMI reports, the Caixin China Jan manufacturing PMI rose by +0.2 points to 48.4, which was stronger than market expectations of -0.1 to 48.1.  On the negative side, however, the national Chinese Jan manufacturing PMI fell by -0.3 points to a 3-1/2 year low of 49.4 and was weaker than market expectations for a -0.1 point drop to 49.6.  In addition, the national Chinese Jan services PMI fell by -0.9 points to 53.5 from 54.5 in December where it was only +0.4 points above the 5-year low of 53.1 posted in Oct 2015.  The markets are looking ahead to tonight’s release of the Caixin Chinese Jan services PMI, which fell by a total of -1.8 points in Nov-Dec to a 1-1/2 year low of 50.2.

Russian-OPEC production cut is not likely despite Venezuelan efforts — Venezuela is pushing hard for a coordinated Russian-OPEC production cut as Venezuelan oil minister Eulogio Del Pino is scheduled to hold his second day of meetings today with Russian officials.  Mr. Del Pino then plans to visit Qatar on Wednesday and then visit Iran and Saudi Arabia.  Even if Mr. Del Pino manages to help arrange a meeting between Russian and OPEC officials, it is very unlikely that there will be any agreement to cut production.  Venezuela is desperate for cash and has been pushing OPEC officials for an OPEC production cut, with no luck.  Venezuelan officials apparently think they might be able to get Saudi Arabia and its Gulf partners to agree to cut production if Russia agrees to cut its production.

However, the noise about Russian-OPEC production cuts seems to be designed mostly to spark some short-covering in the oil markets.  The reality is that Russia’s cooperation with OPEC in cutting production is almost non-existent, with the last joint action dating back to 1998.  Iran has already said it will not curb its intent to ramp up its production as quickly as possible to pre-sanctions levels regardless of what Russia and Saudi Arabia might agree to.  That means that the brunt of any production cut would fall on Saudi Arabia and Russia, who would then sacrifice some of their market share to make room for Iran to expand its market share.  Even if Russia and OPEC say they reached a production cut agreement, the markets will view that as mostly PR and will doubt that they will actually follow through with real production cuts.

OPEC production reaches new high — OPEC production in January rose by +0.1% to a record high of 33.113 million bpd (with the data series dating back to the 1970s).  Saudi Arabia in January cut its production mildly by -0.5% to 10.2 million bpd, but there were increases by Iran (+2.1% to 2.86 million bpd) and Kuwait (+3.4% to 3.0 million bpd).  Moreover, OPEC production is destined to move even higher to new record highs this spring as Iran ramps up its production by 500,000 bpd as quickly as possible.  There is no real sign that Saudi Arabia is losing its nerve as it prosecutes its war on high-cost producers and its intent to preserve its market share no matter how low oil prices might fall or how long oil prices stay low.

EIA report — The market consensus for Wednesday’s weekly EIA report is for a +3.75 million bbl rise in U.S. crude oil inventories, a +2.88 million bbl rise in gasoline inventories, a -1.25 million bbl decline in distillate inventories, and a -0.5 point decline in the U.S. refinery utilization rate to 86.9%.  U.S. crude oil inventories in the past two weeks have risen sharply by 12.4 million bbls (+2.6%) as oil producers rebuild inventories after the year-end draw-down tied to tax savings.  U.S. crude oil inventories remain in a massive glut at +36.3% above the 5-year seasonal average.  Meanwhile, product inventories are more than ample with gasoline inventories at +6.9% above average and distillate inventories at +16.2% above average.