Petroleum Prices Still Weak Despite Supply Concerns
RedStone Resource
November 15, 2023
Inside This Edition
Global Supply Chain Pressures Index Hits All-Time Low
The New York Fed’s GSCPI fell to -1.74 in October, down from -.7 in September. This was the lowest reading in the history of the index dating to 1997. Understanding the index is important, it tracks several global metrics that identify whether supply chains are operating normally or if there is supply chain pressure.
Mississippi River Water Levels Still Low, Affecting Barge Volumes
The Mississippi River hit its lowest water level in recorded history for October this year, and lack of rain has kept water levels low. In fact, barge traffic has lost nearly 50% of its normal volume and transits that would normally take approximately 5 days are stretching to 9-10.
Freight Prices Show Some Seasonal Upticks in October
The truckload PPI came in 2.7% higher month-over-month between September and October but remained 13.1% lower vs. October of 2022.
Less than truckload rates in the wake of the Yellow bankruptcy have stabilized, they were 0.6% higher month-over-month between September and October and were 3% higher than a year ago (arguably against weaker volumes). Studying historical periods, if freight volumes were “normal”, rates would rise by 4%-8% over the 12 months following a major LTL bankruptcy. Weaker freight demand has helped keep rates modestly higher.
ECONOMIC BRIEFING
Petroleum Prices Still Weak Despite Supply Concerns
Crude oil inventories in the United States remain very low according to the EIA and measurements at Cushing, Oklahoma. Inventories being held are well below the 5-year average and are lower than they have been in nearly 10 years. Despite these low inventory levels and growing conflict in the Middle East, West Texas Intermediate prices are down to $77.38 a barrel. This is largely due to weak global demand for oil and has little reflection on supply.
Despite the US running Strategic Petroleum Reserves to lows not seen since the early 1980’s and Cushing inventories approaching their “operational minimums”, oil prices as mentioned are 1.8% lower than they were a year ago and they have dropped .25% since the beginning of the year. The EIA still believes that oil prices will average in the mid-$80 range in 2024. More than 44% of the price of a gallon of diesel is tied to petroleum prices, and falling WTI is good for keeping diesel prices moderately higher for now. This winter will see some increases in diesel refining challenges and any uptick in freight movement will add to diesel supplies issues. In addition, Russia has started to cut some diesel exports which will ripple through Europe and could push the US to export more diesel to help cover shortages for allied nations.
Global Supply Chain Pressures Index Hits All-Time Low
The New York Fed’s GSCPI fell to -1.74 in October, down from -.7 in September. This was the lowest reading in the history of the index dating to 1997. Understanding the index is important, it tracks several global metrics that identify whether supply chains are operating normally or if there is supply chain pressure.
The index itself is based on the standard deviation from zero (or normal). When conditions are hot and distribution systems are broken, there are positive scores in the index, a negative reading such as the current one suggests that supply chain pressures are very low. Said another way, purchasing managers can better plan their restocking activity knowing that they can count on stable transit times, a moderate pricing environment, and multiple mode/capacity options.
TRANSPORTATION BRIEFING
Mississippi River Water Levels Still Low, Affecting Barge Volumes
The Mississippi River hit its lowest water level in recorded history for October this year, and lack of rain has kept water levels low. In fact, barge traffic has lost nearly 50% of its normal volume and transits that would normally take approximately 5 days are stretching to 9-10. This is backing up grain silo operations and is slowing down truck transits that move grains from farms to major distribution points.
Transportation costs for barge traffic are also rising, some estimates suggest that rates in the Midwest (those affected by the Mississippi River traffic) are 20% higher or more. Officials are trying to dredge some of the low-water level areas to increase operating depths, but barge operators are still being forced to limit weight and reduce the number of barges being navigated with single tugs. Much of this is taking a toll on the farming community, and prices seem to be impacting farmers the most. Grain brokers trying to export US grains are keeping a lid on prices so that they can remain competitive against foreign competition at a time when the dollar is strong. Most farmers in the upper Midwest that use barge traffic report that they are being forced to absorb the additional costs of transportation in most instances.
Freight Prices Show Some Seasonal Upticks in October
The Producer Price Index (PPI) is a good proxy for street level freight prices, but they include both contract and spot rates and fuel surcharges. With diesel prices stable over the past two months, changes in the PPI are more reflective of actual freight movement price changes. The truckload PPI came in 2.7% higher month-over-month between September and October but remained 13.1% lower vs. October of 2022.
Less than truckload rates in the wake of the Yellow bankruptcy have stabilized, they were 0.6% higher month-over-month between September and October and were 3% higher than a year ago (arguably against weaker volumes). Studying historical periods, if freight volumes were “normal”, rates would rise by 4%-8% over the 12 months following a major LTL bankruptcy. Weaker freight demand has helped keep rates modestly higher.
Freight rail was also experiencing a jump in prices, the PPI showed prices jumped by 1.3% M/M between September and October and were 1.6% higher vs. rates in 2022. If the National Retail Federation forecasts are accurate, there is expected to be an increase in inbound TEUs in November and December that would help spark some additional intermodal freight volumes.
