by Calculated Risk on 8/06/2005 12:01:00 AM

Oil prices (WTI Sept Delivery) closed over $62 per barrel today. And gasoline is averaging $2.29 per gallon. Gasoline prices are expected to set a new nominal record next week. Despite this relatively high price, demand for gasoline has remained robust.

Click on graph for larger image.

This graph (data from DOE) shows the average US daily demand for gasoline by month for the last 6 years. Although there is some randomness, demand has clearly been increasing every year and demand growth remains robust in 2005.

Most of the increase in gasoline prices has come from increases in the price of crude oil. Both pgl and Kash have pointed this out on Angry Bear. But now, due to some refinery problems, gasoline stocks have been dropping. The AP noted:

At least seven refineries have reported problems of one kind or another, ranging from fires at Chevron Corp.'s El Segundo, Calif., and BP PLC's Texas City refineries to the complete shutdown of Exxon Mobil's plant in Joliet, Ill.

Although gasoline stocks have dropped, they are still in the normal range and refinery problems have not impacted gasoline prices yet.

The DOE comments:

Recent refinery problems point to the potential for higher prices as the next few weeks unfold, but absent any additional major petroleum infrastructure problems, a repeat of the August 2003 price spike is very unlikely.

Since gasoline stocks are low and demand growth robust any disruption (a hurricane in the GOM or a refinery fire) could lead to significantly higher gasoline prices.

Meanwhile, stocks of crude oil remain above normal. The primary reason for the high price of crude, according to the DOE, is the limited excess world production capacity, not lack of current supply. Dr. Hamilton offers some other possible reasons and discusses peak oil issues with geography professor Dr. Robert Kaufmann at the WSJ Online.

The final graph shows oil consumption by sector. You can see why it is important to follow gasoline demand.

The industrial sector has never returned to the 1979 consumption levels (due to a combination of efficiencies and substitutes) and "other uses" has also declined significantly, primarily because electricity generation has moved away from oil. This leaves motor fuel and "other transportation" as the major growth sectors for oil consumption.

This suggests that any reduction in oil consumption will have to come mainly from transportation. To reduce oil consumption for transportation, people will have to drive less, buy more efficient vehicles, or substitutes, suitable for transportation, will have to be found.

So far, even at these higher prices, we haven't seen any evidence of reduced consumption for transportation.

by Calculated Risk on 8/05/2005 09:56:00 PM

The Guardian reports:

The number of personal insolvencies in England and Wales has risen to its highest level in 45 years, official figures showed today.

I wonder if this is related to the housing slowdown? The article provides these statistics:

In the April to June period, the number of personal insolvencies rose to 15,394, the highest since comparable records began in 1960, the Department of Trade and Industry said.

That was up 36.8% compared to a year ago and 11.7% on the quarter. The insolvencies were made up of 11,195 bankruptcies - also the highest on record - and 4,199 individual voluntary arrangements.
...
The main British banks have all reported a rise in bad loans as more people have fallen into arrears with their loan and credit card payments. Barclays today said provisions for bad loans and other credit provisions rose 20% to £706m in the first quarter, although Barclays said the rise at its Barclaycard credit card unit was partly due to an increase in lending.

John Butler of HSBC cautions about a change in the bankruptcy laws, but notes Scotland didn't change their rules and is seeing a similar trend. Butler added:

"The worrying element is that at a time of high employment and low interest rates insolvencies have been rising," Mr Butler said.

I found these comments interesting:

"The recent overall signs that the labour market has started to soften means that there is a growing risk that individual insolvencies will climb markedly further over the coming months," said Howard Archer of the consultancy Global Insight.

"While Thursday's cut in interest rates will provide some very modest relief to debtors, there is the danger that it could encourage people to borrow more," Mr Archer said. "This is something the Bank of England will need to keep a close eye on."

Usually rate cuts are intended to encourage more borrowing. It sounds like Archer is arguing this cut was intended to provide "relief" to overextended borrowers. Wouldn't that require more stringent lending guidelines in conjunction with the rate cut?

by Calculated Risk on 8/05/2005 12:15:00 PM

Kenneth R. Harney writes that Wall Street has put the brakes on Option ARMs. He believes that an Aug 1st S&P negative report downgrade on option ARMs, combined with a new rgulatory guidance in the Fall will be "sayonara" for Option ARMs.

On Aug. 1, Standard & Poor's blew the whistle on option ARMs. After an intensive study of recent mortgage-backed bonds, it concluded that lenders are allowing credit standards to slip too far. And too many of the borrowers using option ARMs are paying the minimum amounts per month, thereby accumulating potentially toxic levels of debt — especially in markets where home values are likely to soften.

“We wanted to jump in before this got any worse,'' said Standard & Poor's mortgage bond director Michael Stack. By “any worse,'' he meant that if credit standards continued to decline, there would be a rising probability of defaults on option ARMs — something unacceptable to bond investors.

A second development potentially affecting option ARMs is under way at the federal financial regulatory agencies. A task force headed by Deputy Comptroller of the Currency Barbara Grunkemeyer is preparing new underwriting and credit risk guidelines on option ARMs, interest-only mortgages and reduced-documentation loans offered by the nation's lenders. In an interview, Grunkemeyer said the new guidelines could be out “by early fall,'' but there is no specific target date.

She said that financial regulators have “noticed that these products have taken off in the past six months.'' The goal of the guidelines will not be to eliminate any particular loan type, she emphasized, but “to make sure banks are offering (interest-only and option ARMs) in a safe and sound manner and doing so in a way that allows consumers to understand the risks.''

Judging by the negligible impact of the previous "guidance", the S&P report downgrade is probably far more important.

Hat tip to Ben Jones - a all housing, all the time, site. I'm primarily following housing since I think it is the key to the overall economy going forward. Housing has been the driver for jobs, credit growth, the declining savings rate, and probably even a major contributor to the trade deficit. I believe the end of the housing boom will lead to slower growth and will have major implications for the World economy.

by Calculated Risk on 8/04/2005 09:00:00 PM

The California Association of Realtors (C.A.R.) released survey results this week showing: "California Households Fall $70,480 Short in Income Needed to Purchase Home; Income Gap in San Francisco Bay Area at $102,230"

California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California, according to the California Association of REALTORS(R) (C.A.R.) Homebuyer Income Gap Index(TM) (HIGI) report for the second quarter of 2005, released today.

Click on graph for larger image.

The Homebuyer Income Gap Index(TM) for California increased 28.3 percent during the second quarter of 2005 compared to the second quarter of 2004, when the gap stood at $54,920, the median household income was $52,630, and qualifying income needed to purchase a median-priced home at $461,280 was $107,550.

Although I think there are some inherent problems comparing medium income to medium house prices, the year over year comparison seems appropriate.

by Calculated Risk on 8/04/2005 01:28:00 PM

As expected, the BoE cut the Repo rate by 25 bps. The BoE believes that slackening demand will keep inflation in check.

...the Committee judged that a decrease of 0.25 percentage points in the repo rate to 4.5% was necessary to keep CPI inflation on track to meet the 2% target in the medium term.

The minutes will be released on Aug 17th and it might be interesting to see the vote on the rate cut. Last month was 5 to 4 against a cut. The Financial Times reports:

The first rate cut by the Bank of England in two years was widely expected and had little immediate effect on financial markets. But it was an important symbolic moment, especially given the contrast with the US Federal Reserve which is still committed to raising rates.
...a lot clearly depends on the UK's consumers. The housing market has stabilised, rather than collapsed, but that still seems to have weighed on spending patterns. Some, however, would argue that the UK is still seeing the effect of last year's rate tightening. As that fades, spending should pick up in the second half of the year. If the optimists are right, this rate-cutting cycle may turn out to be short.