by Doug Casey, Casey Research:
Oil is plummeting right now. The price of oil has fallen each of the last six days. It’s now down 19% since the second week of June. And it’s trading at its lowest level since April.
If you’ve been reading the Dispatch, this might seem like déjà vu. For much of last year, we wrote about how oil was in free fall.
As you may recall, oil prices crashed for a simple reason: the world had too much oil.
You see, new methods like “fracking” made it possible for companies to pump billions of barrels of oil that were once out of reach. U.S. oil production has nearly doubled since 2006. Last year, production hit its highest level since the 1970s. Output from other key oil producing countries also spiked.
Overall, the price of oil fell nearly 75% from its 2014 high. Then, earlier this year, oil started to rally. It surged 89% from February to June…only to crash again recently.
But, this time, oil is falling for a different reason. As you’re about to see, it’s the latest sign that the global economy is headed for big trouble…
• Demand growth for oil has crashed…
The Wall Street Journal reported on Monday:
Global oil demand for the third quarter of this year is growing at less than a third of the rate it did in the same period a year ago, according to London-based Barclays bank. Slower economic growth has been the major contributor.
“Through the last four or five weeks it’s just grown increasingly bearish” because of the gasoline glut, said Andy Lipow, president of Lipow Oil Associates in Houston. “The biggest concern is seeing a slowdown in the economies in Europe and China causing the dampening of demand growth.”
Other key economies are consuming less oil too. Forbes reported on Sunday:
Japan and South Korea, two other major importers are also grappling with their own macroeconomic concerns, with Japanese oil imports at historic lows. Only India is offering some crumb of support, but even that is currently being questioned. Analysts at Morgan Stanley say that while the country remains a bright spot for demand, the growth is of a lower quality.
Oil is the most important commodity on the planet. It literally powers the global economy. If demand for oil is weak, it means the global economy is likely weak too.
• Demand for gasoline is also down big…
According to the Energy Information Administration (EIA), U.S. gasoline stockpiles hit their highest seasonal level since 1990 last week.
Folks are buying gas at the slowest pace in five years. According to Forbes, demand for gasoline grew just 4.5% last month. That’s its slowest growth since 2011.
The big drop in gasoline demand caught many investors by surprise. According to Reuters, analysts expected a “record U.S. summer driving” season.
• Oil and gasoline consumption can say a lot about the economy…
When the economy is doing well, people drive more. When the economy slows, folks take fewer road trips and vacations.
That’s why we watch oil and gasoline prices closely. If folks are filling up their tanks less often, it can mean people are cutting back on spending. In short, oil and gasoline prices can signal problems long before they show up in “headline” economic numbers.
Most investors look to GDP, the jobs report, and other government statistics for clues about how the economy is doing. Right now, these “official” indicators are saying the economy is fine.
The problem is, most government statistics are lagging indicators. For example, the government won’t report second-quarter GDP until this Friday. The second quarter ended almost two months ago.
By the time the government admits something is wrong with the economy, it’s usually too late. Meanwhile, oil and gasoline practically trade around the clock. They’re real-time indicators.
And right now, both are saying that the global economy is slowing.
• Caterpillar (CAT) is also saying the economy is in trouble…
Caterpillar is the world’s largest publicly traded machinery manufacturer. It sells trucks, bulldozers, and other heavy machinery to miners, energy producers, and lumber companies. If Caterpillar is struggling, it means the “real economy” is likely struggling.
Yesterday, the company released ugly financial results. Its sales plunged 16% last quarter. Profits fell 32%.
If you’ve been reading the Dispatch, you know Caterpillar’s struggles are nothing new. Its global sales have now fallen 43 months in a row. That’s more than twice as long as the 19-month sales drought the company had during the financial crisis. Mind you, the global economy is supposedly recovering right now, according to many in the mainstream media.
• Caterpillar’s business is hurting on all fronts…
The Wall Street Journal reported yesterday:
In the latest period, revenue fell across all segments, paced by a 31% drop across Latin America, where Brazilian and Mexican economies remain particular soft spots. Sales across North America fell 16%, largely because of the energy price collapse, while Caterpillar’s Europe, Africa and Middle East and Asia Pacific businesses also posted double-digit declines.
• Caterpillar doesn’t expect business to pick up anytime soon…
Yesterday, the company lowered its profit expectations for the year. It now expects to make $3.55 in earnings per share instead of $3.70. Yesterday was the second time since April that Caterpillar cut its earnings outlook.
According to its earnings release, the company sees dark clouds on the horizon:
World economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve. Commodity prices appear to have stabilized, but at low levels. Global uncertainty continues, and the recent Brexit outcome and the turmoil in Turkey add to risks, especially in Europe.
The company announced plans to shut down or consolidate 20 of its plants by the end of 2018. It also said it plans to lay off workers.
• E.B. Tucker, editor of The Casey Report, has been warning about a slowing economy for months…
In April, E.B. said the economy was headed for tough times.
Evidence of the weak “real” economy is everywhere…
In total, 639 U.S.-listed public companies with market capitalizations of at least $1 billion had declining sales compared to one year prior. Last year, the number of companies was only 324. That means the number of companies reporting declining sales doubled over the last year. And it’s going to get worse.
E.B.’s call was spot on. As we told you yesterday, corporate earnings are on track to decline for the fifth straight quarter. That hasn’t happened since the 2008–2009 financial crisis.
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