Sluggish Freight Movements Have Downside Risks
Global distillate markets remain heavily oversupplied but the glut will not clear unless the world economy avoids recession and there is a renewed acceleration in freight demand.
Recent data have been mixed. The consumer side of the U.S. economy appears to be strong but the industrial side is still struggling, and in the rest of the world growth appears to be slowing.
U.S. freight movements picked up at the start of the year but demand for moving manufactured products and raw materials across the country remains sluggish.
Combined freight movements by road, rail, barge, pipeline and aircraft increased in December and January, the first time freight has increased for two consecutive months since November 2014 (http://tmsnrt.rs/1pa8DbM).
Freight movements picked up in January despite the exceptionally severe weather across much of the country that month, according to data from the U.S. Bureau of Transportation Statistics.
But freight movements were still 0.5 percent below year-ago levels and almost 1.3 percent below their November 2014 peak (http://tmsnrt.rs/1pa8Iw7).
Freight demand has been hit by a strong currency, which has harmed exports, lower coal consumption at power plants, the downturn in oil and gas drilling, and recession in many parts of the manufacturing economy.
Manufacturers, distributors and retailers are still struggling to reverse the build up of raw materials, work in progress and unsold finished products which began in 2012 and accelerated from the middle of 2014.
The ratio of inventories to sales across the whole economy climbed from 1.24 months in March 2011 and 1.29 months in July 2014 to 1.39 in December 2015, according to the U.S. Census Bureau (http://tmsnrt.rs/1pa8Go9).
Manufacturers, distributors and retailers have cut orders and deliveries in a bid to bring stockpiles under control, hitting freight demand hard.
Stagnant or falling freight over the last 15-16 months has in turn cut consumption of middle distillates like diesel fuel (http://tmsnrt.rs/1paaT31).
The slowdown is not confined to the United States. China's National Bureau of Statistics reports inland freight movements were basically flat in 2015 after growing rapidly in 2013 and 2014.
World trade was up just 1.5 percent in the last three months of 2015 compared with the final quarter of 2014, according to the Netherlands Bureau of Economic Policy Analysis ( "World Trade Monitor", CPB, Dec 2015).
The International Monetary Fund has warned about a retrenchment in global capital and trade flows. "Trade flows ... are being dragged down by weak export and import growth in large emerging markets such as China, as well as Russia and Brazil."
The Fund thinks downside risks to the global economy have increased ("Policy imperatives for boosting global growth and prosperity", IMF, March 2016).
U.S. gasoline consumption, tied to household incomes and employment, is running at a record seasonal rate while diesel demand, more closely tied to the industrial economy, is at multi-year lows.
U.S. manufacturing activity continued to shrink in February, but at a slower pace than in January, according to the widely watched purchasing managers index published by the Institute of Supply Management.
U.S. freight indicators have been mixed recently, with small improvements in trucking and containerised traffic on U.S. railroads, but air freight and bulk cargo movements by barge and railcar down in January.
Composite leading indicators published by the Organisation for Economic Cooperation and Development point to an easing of growth across the advanced economies.
The OECD-wide composite leading indicator has worsened successively each month since February 2015 and fallen below the long-term average since September 2015 ("Composite Leading Indicators", OECD, March 2016).
The critical question for fuel markets is whether the current slowdown will turn out to be only a pause or a prelude to recession.
By John Kemp