- April U.S. housing starts expected to rebound after bad weather in March
- April U.S. industrial production expected to show a solid gain
- Oil prices rally sharply after Saudi Arabia and Russia pitch 9-month production-cut extension
- Weekly EIA report
April U.S. housing starts expected to rebound after bad weather in March — The market consensus is for today’s April housing starts report to rebound higher by +3.7% to 1.260 million after March’s -6.8% decline to 1.215 million. April building permits are expected to edge higher by +0.2%, adding to March’s +4.2% increase.
U.S. housing starts in April are expected to recover the ground lost in March because of bad weather. U.S. housing starts in general remain in strong shape since home builder confidence continues to run high. The National Association of Home Builders Housing Market index of 70 in May was only 1 point below the 11-3/4 year high of 71 posted in March. The main negative factor for home builders is higher lumber prices after President Trump on April 24 slapped tariffs of up to 24% on Canadian lumber imports.
Strong home builder confidence is based on strong U.S. home sales, tight supplies, and strong prices. March new home sales rose by +5.8% to 621,000 units, which was just slightly below the 9-year high of 622,000 posted in July 2016. The 5.2 month supply of new homes on the market in March was well below the long-term average of 6.1 months. The median price of a new home in March was $315,100, which was just mildly below the record high of $332,700 posted in December 2016.
April U.S. industrial production expected to show a solid gain — The market consensus for today’s April industrial production report is for a solid increase of +0.4%, adding to March’s +0.5% increase. Excluding mining and utility output, April manufacturing production is expected to show a +0.4% increase, reversing the -0.4% decline seen in March that was tied mostly to bad weather.
U.S. industrial production has substantially improved in recent months with the year-on-year growth rate in March reaching a 2-year high of +1.5% y/y. March manufacturing production was up +0.8% y/y, just -0.2 points below the 2-1/4 year high of +1.0% y/y posted in February.
Manufacturing confidence has cooled a bit in the past two months as the ISM manufacturing index fell by a combined -2.9 points in March-April from Feb’s 2-3/4 year high of 57.7. U.S. manufacturing confidence has cooled due to some disappointment with the slow-moving Republican growth agenda and to expectations for a slowdown in the U.S. auto industry because of the recent weakness in sales. However, U.S. manufacturers are still relatively optimistic about the outlook due to a substantial improvement in business investment and improved overseas growth.
Oil prices rally sharply after Saudi Arabia and Russia pitch 9-month production-cut extension — June WTI crude oil prices on Monday closed sharply higher by +$1.01 (+2.11%) at $48.85 after Saudi Arabia and Russia said they favor extending their production cut for 9 months into Q1-2018. That would be longer than recent market expectations for a 6-month extension through the end of 2017.
While Saudi Arabia and Russia favor a 9-month production cut extension, they will still have to convince the other OPEC and non-OPEC production-cut participants to go along with the 9-month plan. OPEC meets next Thursday (Sep 25). Oil producers will likely go along with the 9-month plan if only because it is obvious that a 6-month extension will not be sufficient to support oil prices.
But even if producers agree to a new 9-month extension, the question then becomes whether there will be substantial backsliding on compliance. Compliance in the first six months of the agreement has been very good, but that is partially because some producers used the downtime to do maintenance that needed to be done anyway.
A 9-month extension of the production cut agreement is certainly a step in the right direction for OPEC as it tries to erase the glut of world oil inventories. However, even the 9-month extension will not be enough to save oil prices if OPEC isn’t successful in curbing U.S. oil production. Since the OPEC agreement was reached on November 30, U.S. oil production has risen by 615,000 bpd, offsetting more than half of OPEC’s 1.2 million bpd production cut. Moreover, U.S. producers continue to bring new rigs on line and there is no sign that the steady rise in U.S. production will slow anytime soon.
Monday’s +2.11% rally in oil prices gave oil stocks a boost. The SPDR Oil & Gas Exploration & Production ETF (XOP) on Monday posted a new 1-1/2 week high and closed +0.74% higher. However, XOP is still in bad shape at down -14.2% year-to-date versus the +7.3% year-to-date gain in the S&P 500 index.
Weekly EIA report — The market consensus for Wednesday’s weekly EIA report is for a -2.75 million bbl decline in U.S. crude oil inventories, a -1.0 million bbl drop in gasoline inventories, a -1.25 million bbl drop in distillate inventories, and a +0.5 point increase in the refinery utilization rate to 92.0%. U.S. crude oil inventories fell sharply by -13.018 million bbls (-2.4%) in the past five weeks, which has brought U.S. crude oil inventories down to +27.2% above the 5-year seasonal average versus the near record high of +40.7% above average seen in February. U.S. crude oil inventories have now fallen to the tightest level relative to the 5-year seasonal average in 1-3/4 years. Meanwhile, product inventories remain ample with gasoline inventories at +9.1% above the 5-year seasonal average and distillate inventories +16.2% above average. U.S. oil production last week rose by another +0.2% w/w to post a new 2-year high of 9.314 million bpd.