US equities traded in a narrow range on Monday. Under previous circumstances, a rising price of oil would have given more of a lift to equity prices, and the indifference of the stock market to the oil prices betrays underlying weakness in the US economy. US infrastructure can’t support America’s capacity to pump oil out of the ground.
The price of oil fell in the year-end liquidity panic and rose with the Federal Reserve’s reassurance that it would keep interest rates low and keep its holdings of securities high. Oil continues to recover, gaining about 25% since the beginning of the year, while the S&P energy sector has been flat since the beginning of the year.
Shale producers have lagged the broad energy sector, with the unconventional drilling ETF FRAK up just 13% year to date, about half as much as the oil price and less than the energy sector as a whole.
US energy infrastructure (pipelines, railroads and even trucks) can’t handle the output of the shale boom. Higher transportation costs have pushed down US crude prices relative to global prices, and the differential between the West Texas Intermediate and North Sea Brent crude oil benchmarks has risen to a record of nearly 20%.
The difficulty of getting US crude out of the Permian Basin and other major shale production regions has also dampened demand for oil field equipment. In real terms, durable goods orders for oilfield equipment have fallen to less than half of their 2011 peak.
The US oil industry rig count as reported by Baker Hughes has fallen from a January peak of 947 to 907 last week, and stands at the lowest level in ten months, and the US government has nudged down its 2019 production target.
Demand for oil isn’t the problem. World consumption of oil and natural gas continues to rise in a straight line.
Weak economic growth in Europe and the US is more than offset by China, where demand for oil (as well as iron ore) continues to rise at an increasing rate.
As I reported previously, capital expenditures remained disappointing, despite the largest corporate tax cut in US history. Corporate stock buybacks exceed total CapEx for the first time since 2007.
The impressive job growth numbers of the past year came largely from small businesses and largely in unskilled, lower-paid job categories. Last year’s 3% US economic growth was lopsided, concentrated mainly in lower-skilled and lower-paid occupations. Wages have begun to rise significantly for lower-skilled jobs at the bottom of the pay spectrum, compressing margins.
Without improved infrastructure and industrial capacity, US growth is running into capacity constraints. I argued in a March 8 analysis of the disappointing February employment data that the hiring bust wasn’t a fluke. Hiring dropped off the most in sectors like retail and leisure/entertainment, where wage gains had been strongest.
I don’t expect a recession in 2019, but the consequences of a dozen years of underinvestment in US infrastructure and industrial capacity are starting to manifest themselves in obstacles to growth. The 2019 story, I believe, will be characterized by slower economic growth, a modest earnings recession and compressed margins for US corporations.