TIS - bigger picture oilOnce again, this advisory suggests that if you are in the oil business, your input costs MUST be lower than your bottom line ... quite simply, you MUST be profitable in order to survive.
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TRANSPORTATION BELLWETHER
Over the years, we’ve followed the shipping and transportation industries as bellwethers for the global economy and overall demand for raw commodities and trade. Not only does shipping indicate current demand, but it also represents corporate long-range expectations, as the sales cycle for large planes, trains, trucks, and ships can be very long. Additionally, shipping is an industry with many compounding effects on the wider economy. A wide swath of industries and products are needed to complete a large transportation vehicle, and those multiplier effects for new orders are massive.
Railroad shipments are falling at the fastest rate since 2009 in the U.S., and profits have fallen for five straight quarters. This is a troubling sign, and the lower volume appears to be across the board. Q2 shipments declined 5.5% after an almost 2% gain in Q1, with declines in everything from coal to metals to containers filled with consumer goods. Association of American Railroads Total Traffic U.S. Freight Carloads (4 years) Source: Bloomberg LP
Trains and trucks compete with one another for some shipments, and it appears the trucking industry is suffering as well. Too many trucks are chasing too few goods, so the growth of hauling charges has been falling for 20 months. Median volumes are 8.5% lower and rates themselves are down 15%.
Trucking companies have been shedding tractors in their fleets to align with weaker demand. Fleets have shrunk 3.2% since 2013, with just under half of semi-truck buyers not expecting to place new orders within the next 6 months.
Declines in U.S. and Canadian production of oil has also been weighing on the transportation sector. Crude production fell 220,000 bbl/day in April (the most recent data from the IEA), which is the largest one-month drop since 2008. If we include Canada and other non-OPEC countries, crude production fell 900,000 bbl/day, the largest decline since 1992. DoE U.S. Crude Oil Production (6 years) Source: Bloomberg LP
We think this trend will continue for crude shippers as a huge oil inventory has built up globally. Crude inventories in developed markets climbed to an all-time high of over 3 billion barrels in May, while oil stored on ships rose to its highest since 2009, according to the IEA. There is simply too much oil being produced globally.
Railroad and trucking company stocks are not falling as much as one might expect based on these numbers, however. Drivers are one of the biggest expenses of these industries, and the prospect of driverless technology cutting costs and improving profit margins is boosting equity prices.