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RPT-COLUMN-U.S. manufacturing slowdown stokes fears about oil demand: Kemp
January 7, 2016 / 6:00 AM / 2 years ago

RPT-COLUMN-U.S. manufacturing slowdown stokes fears about oil demand: Kemp

(Repeats Jan. 6 column. John Kemp is a Reuters market analyst. The views expressed are his own)

* ISM manufacturing index: tmsnrt.rs/1Rhzgry

* Freight transport index: tmsnrt.rs/1R6Wct7

* Business inventories: tmsnrt.rs/1RhzKOk

* Distillate consumption: tmsnrt.rs/1R6Wd07

By John Kemp

LONDON, Jan 6 (Reuters) - Growing signs of weakness in the U.S. economy are helping keep oil prices under pressure even as tensions escalate across North Africa and the Middle East.

U.S. manufacturers reported business activity contracted for the second month running in December, according to the Institute of Supply Management (ISM).

The ISM’s composite manufacturing index was below 50 in both November and December 2015 for the first time since November 2012 and before that July 2009.

The Institute contacts around 300 purchasing managers each month to enquire about changes at their firms in production, new orders, employment, inventories and the speed of supplier deliveries.

The results are used to produce the purchasing managers' index. In the past, index readings below 50 have generally been associated with a contraction in manufacturing activity (tmsnrt.rs/1Rhzgry).

The index is strongly cyclical and not every slowdown heralds an economic recession (not least because manufacturing now accounts for less than 15 percent of GDP).

But U.S. manufacturers have reported slowing growth since the middle of 2015 which turned into an outright contraction towards the end of the year.

The drop in the index is consistent with other indicators pointing to a pronounced slowdown in manufacturing activity in the second half of 2015.

Freight movements by road, rail, barge and pipeline have been flat for the past year, ending five years of strong growth, according to the U.S. Bureau of Transportation Statistics (tmsnrt.rs/1R6Wct7).

On the railroads, total freight movements fell 4.5 percent in the second half of 2015 compared with the same period a year earlier.

Containerised rail freight was flat between July and December compared with the prior year, according to the Association of American Railroads.

Inventories of raw materials, work in progress and finished products held by manufacturers, wholesalers and retailers rose sharply towards the end of 2014 and businesses had failed to reduce them by October 2015, according to the U.S. Census Bureau (tmsnrt.rs/1RhzKOk).

It is still not clear whether the current weakening in U.S. manufacturing is a temporary pause that will be quickly reversed or heralds a lengthier slowdown.

But slowing growth in the U.S. industrial economy matters because the United States was one of the bright spots for oil demand in 2015.

After the strongest summer driving season since 2007, gasoline demand growth slowed in the final quarter of the year and ended roughly unchanged from the end of 2014, though still at a seasonally high level.

Distillate demand, however, slid to the lowest level for more than a decade towards the end of 2015, and in the final four weeks of 2015 was almost 460,000 barrels per day, 9 percent, lower than at the end of 2014 (tmsnrt.rs/1R6Wd07).

Part of the weakness in distillate consumption has been caused by higher than normal temperatures across much of the United States this winter.

But distillate is also the main fuel used by trucking firms, railroads, vessel operators and in a variety of off-road vehicles on construction sites.

Some of the weakness in demand is likely to be the result of the slowdown in freight towards the end of the year.

OPEC and especially senior Saudi policymakers have relied on continued strong growth in fuel demand to help rebalance the oil market in 2016.

But the slowdown in fuel demand growth in the United States over the last quarter of 2015 creates uncertainty around that expectation.

Other key fuel markets could also struggle next year. China is struggling to reverse an economic slowdown and many emerging markets, including the Middle East, will continue to be hit by the drop in commodity prices.

Rising tensions across the Middle East threaten to worsen the slowdown in the region even more which will hurt fuel demand.

For much of 2015, the oil market focused on developments on the supply side, with a high degree of confidence around demand.

In 2016, concerns are likely to switch back in part to the health of the global economy and growth in fuel demand. (Editing by Susan Thomas)

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