Oil and Diesel Prices Continue to Ease
RedStone Resource
June 1, 2023
Inside This Edition
Oil and Diesel Prices Continue to Ease
West Texas Intermediate prices have dipped below $70 a barrel (at the time of writing) on weaker global demand outlooks. Oil inventories in the United States were trending in the middle of the 5-year range and global inventories continued to increase.
Air Cargo Bottoms in April
The International Air Transport Association (IATA) released its latest available data on the global air cargo market and results showed that global demand fell 6.6% from last year for US domestic markets and was down 7% for international markets). This is still down but was contracting slower than last month’s rate of 7.6%
Drug Failures Continue to Increase Among Truck Driver Pools
Since the implementation of the National Drug and Alcohol Clearinghouse in early 2020, the trucking sector has seen more than 180,000 CDL drivers test positive at least once for a banned substance. Among those, 129,100 have had at least two failures and have entered into the “prohibited status”. On an average month, approximately 4,000-5,000 fail their initial test and approximately 2,500-3,000 enter prohibited status.
ECONOMIC BRIEFING
Inflation-Adjusted Imports of Goods Down Through Q1
Imports of products for distribution play an important role in supply chain activity in the US. Data for imports lag nearly two months, but the data showed that goods imports in the first quarter were down 2.6% year-over-year. But interestingly, they were up slightly vs. Q4 of last year. Stripping out the impact of fuel imports, durable goods imports were down 8.4% while non-durable consumer goods imports were down 12.9%.
Computers and accessory imports were also down 19.5% while larger products like automobiles surged amid improving supply chain continuity were up 12%.
Maritime rates are showing this lack of demand. The Shanghai Containerized Freight Index (for instance) is currently at 983.4 points, down substantially from the 5,000-point level posted in early 2022. The Baltic Dry Index (which measures the cost of moving bulk materials) was also showing similar patterns, dropping to 1,123 points from 1,637 in early May and 2,634 a year ago. The National Retail Federation was showing March container volumes down 30.6% year-over-year. The NRF anticipates first half 2023 imports to be down 22.8% from last year with some acceleration in the second half with Q3 being down just 7% (remember that these figures are against difficult comparisons as 2021 set all-time records for imports and 2022 was just 1.2% lower).
Oil and Diesel Prices Continue to Ease
Historically it is clear that interest rates can affect product order patterns (which ultimately can change freight volumes and transportation prices). Oversimplifying, as interest rates rise it pushes the cost of capital higher and supply chain managers are forced to weigh the advantages of holding heavier inventory volumes (to reduce stockouts) against the cost of doing so.
The Federal Reserve is likely to hike interest rates at least one more time, analysts believe that the Fed will hike 25 basis points more in its next meeting to push the Fed Effective Rate to almost 5.1%. Average inflation is still rising at a 4.6% rate vs. wages that are growing on average 4.2%. In addition, moves by the Federal Reserve can change the value of the dollar. The US dollar has dropped 1.9% YTD, which increases the cost of imports. Historically, a rapid change in the value of the US dollar has historically led to significant shifts in transportation freight volumes. One such period was from 2014 to 2016 in which the value of the dollar surged, and inventories surged at the same time (because it was advantageous to use the purchasing power to stockpile resources). Transportation activity was robust in 2014 on the front-end of the period followed by a freight volume slump that followed from late 2014 through 2016. It does have a bearing on what happens in the industry, which is why this will be watched so closely in the quarters ahead.
TRANSPORTATION BRIEFING
Air Cargo Bottoms in April
The International Air Transport Association (IATA) released its latest available data on the global air cargo market and results showed that global demand fell 6.6% from last year for US domestic markets and was down 7% for international markets). This is still down but was contracting slower than last month’s rate of 7.6% according to the IATA.
Unfortunately, North American air cargo firms saw the largest drop on a global basis with a droop 13% year-over-year. US to Europe trade lanes were down sharply by 13.5% while Asian trade lanes were down 9.3%. African airlines were the only region in the world showing increases with a 0.9% increase in demand vs. last year. Asian trade lanes were the second best with a dip of just 0.4%, most of that due to domestic and inter-Asian trade activity. Latin America had the third best performance with a drop of just 1.6%. European markets were down 8.2% and are expected to continue to be weaker throughout much of Q2 as Germany and other European economies officially register recession levels of activity.
Belly capacity overall is increasing as international passenger flight activity increases – this will keep capacity outpacing demand for at least the next quarter. Seasonal increases in demand will help use some of this capacity and e-commerce continues to be strong worldwide, the US alone continues to see e-commerce sales growing 8% year-over-year.
Drug Failures Continue to Increase Among Truck Driver Pools
Since the implementation of the National Drug and Alcohol Clearinghouse in early 2020, the trucking sector has seen more than 180,000 CDL drivers test positive at least once for a banned substance. Among those, 129,100 have had at least two failures and have entered into the “prohibited status”. On an average month, approximately 4,000-5,000 fail their initial test and approximately 2,500-3,000 enter prohibited status.
Among those that enter prohibited status, only 40% successfully get through the Return-to-Duty process and are able to re-enter driving under CDL status. In sheer numbers, of the 129,100 that entered prohibited status since the beginning of the program, just 51,564 have successfully gotten back into driver pools.
Among the types of drugs testing positive, marijuana now accounts for nearly 58% of all failures. Cocaine was the next closest at 15.6%.
One reason that some trucking prices continue to remain elevated despite the drop in volumes is that companies are paying more to attract and retain drivers, train, and build drug awareness programs to stem the number of failures. This does factor into national driver shortages, which of course become more pronounced when volume demand is higher.
