By Brian L. Milne, Refined Fuels Editor, Telvent DTN
The Department of Labor’s non-farm payroll report for April showing job creation at a paltry 115,000 which was much less than expected by the market triggered a selling frenzy in oil futures trading on the New York Mercantile Exchange, with the data suggesting slowing economic growth for the U.S.
The jobs data, which did see the national unemployment rate tick down to 8.1% from 8.2%, but due primarily to people dropping out of the workforce, offered ominous signs for the rate of economic growth looking ahead. Slower economic growth translates into less demand for fuel, while a smaller workforce means fewer are commuting to jobs.
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Several reports have also suggested that gasoline demand has been under pressure this year as the country ages, with an older population driving less. So too, has telecommuting—a long-term trend that would cut into gasoline demand.
The unemployment report was the final straw in breaking the proverbial back of the bullish argument that economic growth was revving up, recently supported by a slew of better-than-expected quarterly earnings reports from US public companies. Recent data however has shown slowing economic growth both here and in China, with China the growth engine for global oil demand. Meanwhile, both Spain and the United Kingdom have fallen back into recession.
Weekend elections added to the uncertainty regarding global economic growth after a Socialist one the French presidency for the first time in roughly two decades, while Greeks voted out many in parliament that supported recent efforts to bring some sort of fiscal order to the Hellenic nation. The votes, where austerity measures have become policy in tackling excessive debt in many euro zone nations but also mean pain for those dependent on the state, cast a pall over recent agreements aimed at reducing debt.
Domestically, oil’s supply side looks different than it had appeared just a few weeks earlier after a subsidiary of Delta Air Lines agreed to buy ConocoPhillips shut Trainer refinery located near Philadelphia. Moreover, Sunoco’s Philadelphia refinery might still be bought, with operations at the facility to be extended from July to August at a minimum to allow details of a deal to be worked out. The potential of having only one of the three refineries in and near Philadelphia permanently closing as previously announced diminishes the outlook for summer fuel shortages in the region.
The prospect of more supply and less demand prompted those holding long positions in NYMEX oil futures to shed some of that length, with a long position one in which the buyer believes prices will move higher. Wholesale gasoline costs are down sharply across much of the country.
An exception was in the Pacific Northwest, where gasoline prices rallied into May despite the dimming bullish sentiment. For this market, refinery downtime pushed prices sharply higher, although the initial gains were dulled by the plunge in benchmark futures prices. Several regional refineries were shut for maintenance or repairs that cut into supply that triggered a short squeeze to push up gasoline prices. Those gains should melt away as refineries return to service joined by the broader market pressures.
About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 16 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.