The economic reports this week were mostly positive. Evidence from the non-manufacturing sector suggests that this broad section of the economy is improving. The latest trade data showed an improvement in the U.S. deficit as exports expanded on strengthened external demand. The rise of unconventional oil and gas is certainly playing a role as U.S. exports of finished petroleum products expand and U.S. imports of crude oil contract. Finally, the factory orders report indicates that manufacturing is poised to grow in 2014. This should lift economic growth. Wholesale trade advanced as well. Turning to chemistry, labor input data suggest that the production in the chemical industry increased. Supporting this notion, the railcar loadings data suggest continued improvement. In other chemistry news, wholesale trade in chemicals fell while inventories rose.
Our running tab of positive indicators for the status of the macroeconomy was unchanged at 17 out of 20 this week. Thus, we continue to post a green banner. For the business of chemistry, the indicators bring to mind a green banner for basic and specialty chemicals.
CHEMICAL RAILCAR LOADINGS
According to the Association of American Railroads (AAR), for the week ending 4 January (week 01), railcar loadings of polymers and basic chemicals (blue line) rose by 2,618 to 29,271 railcars. Compared to the same week last year, loadings were up 13.0% Y/Y. Loadings have been on the rise for eight of the last 13 weeks.
The railcar loadings data are the best ‘real time’ indicator of industry activity. This is especially the case for polymers and other basic chemicals. But the data are fairly erratic. This is one reason why we employ a 13-week moving average to smooth out many of the seasonal irregularities. The 13-week moving average of railcar loadings (orange line) indicates continued improving activity and is now up 2.8% Y/Y.
ENERGY
The Energy Information Administration (EIA) reported a 157 billion cubic feet (BCF) withdrawal in natural gas inventories during the week ending 3 January, above the typical build for this week. Stocks were 15.8% lower than last year at this time and 10.1% below the five-year average. At 2,817 BCF, total gas inventories are at the bottom of the historical range.
Despite severe cold weather in much of the country, natural gas prices (the benchmark Henry Hub), closed at $4.14 per million BTUs on Thursday, down from $4.32 last Thursday. A year ago, the price was $3.27 per million BTUs. Thus, recent prices represent a 31.9% Y/Y increase. In a similar manner, oil prices fell to $106.86 per barrel yesterday (Thursday). A year ago, oil was $113.07 per barrel. Thus, recent prices represent a 5.5% Y/Y decline.
At 25.8:1, the ratio of oil prices to natural gas improved from 25.1:1 a week ago. One year ago, the ratio was 36.2:1. As a rough rule of thumb, when the ratio is above 7, the competitiveness of Gulf Coast-based petrochemicals and derivatives vis-à-vis other major producing regions is enhanced. As the following chart shows, we’ve been above 7 for several years. In the US, nearly 90% of ethylene, for example, is derived from natural gas liquids while in Western Europe, over 85% is derived from naphtha, gas oil and other light distillate oil-based products. Historically, other factors (co-product prices, exchange rates, capacity utilization, etc.) have played a role in competitiveness as well. The current ratio is favorable for US competitiveness and exports of petrochemicals, plastics and other derivatives.
According to Baker-Hughes, for the week ending 3 January the North American natural gas rig count fell by two to 372 rigs. One year ago the rig count was 439 rigs. During the same week, the oil rig count fell by four to 1,378 rigs. One year ago the rig count was 1,318 rigs.
CHEMICAL EQUITY PERFORMANCE
The S&P 500 index rose 2.4% during December. The S&P index for chemical companies also rose, by 4.2%. For the year, chemical equity prices were up 29.0% while the S&P 500 rose by 29.6%, its largest annual gain since 1997. Equity prices are often a good indicator of future activity and represent one component of the leading economic indicators.