It's Not All Oil And Gas

by: Alhambra Investment Partners

By Jeffrey P. Snider

In addition to this morning's "noisy" and suddenly more tame CPI report, there is a broad-based decline in commodity prices that is more than a little bit outside of "usual" volatility. It should be noted at the start that commodity prices are not always direct reflections of economic activity or expectations for future activity, as other factors intertwine and take over dominant roles from time to time. In terms of copper, there is the China/dollar connection as it relates to eurodollar financing of global trade.

In that primary lifeblood commodity, oil, there is always the threat of geopolitical tension particularly as it relates to the Middle East's predilection toward disorder on any given moment. That may include, most recently, tensions even outside of that region with Europe confronted by potential conflict in and over the Ukraine.

Aside from those caveats, however, the behavior of oil prices most recently cannot be a good sign for the global economy; I would include the US in that observation. Regardless of political instability there does seem to be a better than loose correlation between oil prices and marginal economic direction in the past few years.

What is notable about WTI, as opposed to Brent and crude of whatever grade (tapis or LLS) pumped, shipped and received from other global locales, is that the apparent optimism running in the spring of 2014 from the "aberration" of a winter quarter never matched the peak price of last year. WTI topped out at just shy of $111 in early September 2013.

That is not the only indication to do so, including the relevant and parallel commodity of gasoline. Gas sales have largely followed the same pattern, with a deep descent in winter very much disappointing on the way back toward the expected "bounce" in spring.

The contours of the same mini-cycle are evident in gasoline volume, if not totally synchronized in time. That includes the most recent disappointment in sales levels, as well as the most recent peak being reached in September 2013 before the widespread deceleration set in over that "all-important" Christmas shopping season.

When you adjust gasoline sales by population growth, however, the trend appears far deeper and cuts even more along the lines of WTI:

Since the latest figures for gasoline sales only run through May, we don't know yet how the most recent and sharp decline in WTI oil prices correlates with gasoline usage and sales, but I think we can make a reasonable guess about what that may look like. As with other commodities, there are other factors to consider, including vehicle efficiency and consumer preferences about cars and commuting in general. Even with those in mind, there is nothing outside of similar macro factors that would produce such a sharp drop in such a condensed time frame and tie it all together around September 2013.

What is seriously compelling about these trends is that they are echoed in other consumer-related data. Various and even non-government indications for consumers and spending go backward to carve out a conspicuously similar trend, and date to right around the same timeframe (or at least within a few months of September 2013):

If you put all these pieces together, I think oil prices might actually have overstated the spring "forward" this year - perhaps owing more to the geopolitics end of it than optimism about the perpetual and perpetually elusive recovery. In any case, the recent drop in oil prices is potentially indicative of, with these other correlations in mind, not just an end to the spring "bounce" but something perhaps more destabilizing economically. With WTI now within earshot of the winter low point, there is at least some scale to that idea as we look for further observation for the rest of the third quarter and beyond. Given the performance of credit markets as well, there is more than a good deal of pessimism about economic prospects however the conclave at Jackson Hole and the pyramid of economists that parrot it stand.