First it was Shoppertrak, then it was the National Retail Federation, then it was IBM, and now, with its own set of internal data, here is Bank of America slamming the door shut on US retail spending as a source of Q4 growth, and proving once and for all that the extended Thanksgiving-weekend, and the start to US holiday spending season, was the biggest dud since Lehman.
The BAC internal data showed a sluggish start to the holiday shopping season. Spending on BAC credit and debit cards over Thanksgiving and Black Friday declined 1.6% yoy. In order to restrict the sample to holiday-related spending, we are measuring “core control” sales, which nets out food services, gasoline, building materials and autos, making it a comparable sample to the Census Bureau’s data. While not as dismal as the 11% yoy decline reported by the National Retail Federation (NRF), our data supports the weak anecdotes.
(…) There are a few reasons to advise caution when interpreting Black Friday sales. For one, measuring sales over a two-day period is naturally noisy, but particularly since retailers adjust the promotion schedule over the years. (…) the promotions start earlier each year making the “door buster” deals of Black Friday less appealing. Moreover, the shift toward online shopping provides greater access to sales and incentives, also taking the focus away from Black Friday. The bottom line is that while we tempered our optimism, we still look for holiday sales to increase this year given the improving economic backdrop.
Based on a WardsAuto estimate, light vehicle sales were at a 17.08 million SAAR in November. That is up 5.5% from November 2013, and up 4.5% from the 16.35 million annual sales rate last month.
(…) Raymond James Financial Inc., for example, expects WTI prices to stabilize at around $75 a barrel.
“At those levels, companies are going to reduce their capital expenditures,” Raymond James analyst Carlos Newall said Tuesday. “Production is not going to slow to a halt, but it is going to slow. You’ll see a reduction in rig count and then there will be a six- to nine-month lag when you’ll see a reduction in production.”
The three key U.S. shale oil fields are the Bakken in North Dakota and the Eagle Ford and Permian in Texas. Scotiabank economist Patricia Mohr has calculated that the average break-even price in the Bakken and Permian is $69 and $68, respectively, but with individual wells ranging from $54 to $82 a barrel.
But even if prices are above the break-even mark, companies will have to cut their drilling operations as their cash flow plummets from heady levels this year, and financing from banks and capital markets gets tighter.
Enerplus Corp., which pumped an average 22,400 b/d (including associated natural gas production) in the Bakken in the third quarter, expects to pare its 2015 budget by an unspecified amount from about $830-million (Canadian) this year. The Calgary-based company’s break-even costs are $50 (U.S.) in the best areas of the North Dakota play, and a portion of its overall production for next year is hedged at $93 oil, chief executive officer Ian Dundas said in a recent interview.
“We’re not planning on pushing our balance sheet,” he said. “Whatever our growth aspirations would have been in a $95 oil world, they are lower in a $70 oil world. There’s just less money to go around.”
To be sure, not all shale plays are created equal. Even within a zone, analysts say break-even economics can vary from one well to the next, depending on geology and other factors. Drilling in so-called “sweet spots” of the Bakken and the Eagle Ford in Texas, or the Cardium and Duvernay in Alberta, still makes sense even at much lower oil prices, said Callan McMahon, a senior analyst with energy consultancy Wood Mackenzie Group.
A sustained drop in oil prices threatens to weed out the weaker players, pressuring high-cost producers and setting the stage for production cuts and consolidation.
“The guys that had weak balance sheets at $100 oil are in trouble now and will probably not survive,” said Scott Saxberg, chief executive officer of Crescent Point Energy Corp., which pumps crude from the portion of the Bakken that spills over the Canadian border. He was speaking about the industry as a whole, rather than just shale oil producers.
Continental Resources Inc., which is among the largest producers in the Bakken, has already cut expenditures by $600-million and trimmed its forecast for production growth, although it can take up to nine months for lower prices to result in lower volumes at the well head. The company produced an average of 121,604 barrels of oil equivalent per day in the Bakken in the third quarter, up 29 per cent from the third quarter of 2013.
Like other U.S. independent producers active in tight oil plays, Continental has seen its share price pummelled, dropping by half to $39.70 from its August peak. The company said Tuesday it is monitoring the market to determine whether it needs to cut back further.
“We have said that if oil prices declined and stayed at a lower level for an appreciable period, we may adjust capex further and this would likely impact our expected 2015 production growth rate,” Continental vice-president Warren Henry said in an e-mail. “We can’t really be more specific than that since, in that scenario, drilling and completion costs will likely also decline and that would affect our decision.”
Don’t be fooled by all the analysis: the reality is that many wells have already stopped pumping uneconomic oil. The high costs producers have pulled the plug and the marginal guys are being told to do so by their banks. Production is already declining.
From Ed Yardeni:
One of our accounts noted that the seasonally adjusted production numbers show a decline of 0.4mbd over the past 10 weeks through the week of November 21 to 9.0mbd, while the unadjusted data continued to rise by 0.3mbd to 9.1mbd. The former suggest that the plunge in oil prices may be depressing production already, while the latter suggest that’s not so.
Eurozone Private-Sector Activity Slows More Than First Thought Activity in the eurozone’s private sector slowed more sharply than previously estimated in November, according to surveys of purchasing managers, making it likely the currency area’s economy will end a disappointing year on weak footing.
(…) Data firm Markit on Wednesday said its composite purchasing managers index—a measure of activity in the manufacturing and services sectors in the currency bloc—fell to 51.1 in November from 52.1 in October, reaching a 16-month low. That was lower than the preliminary estimate released late last month of 51.4.
Spain’s services sector slowed most sharply during the month, with its PMI falling to 52.7 from 55.9 in October. Spain’s manufacturing sector picked up during the month, but not enough to prevent the composite measure from falling to a nine-month low.
The revised figures recorded a steeper contraction in French activity, and the slowest expansion in German activity for 17 months. The only positive note was sounded in Italy, where private-sector activity rose at the fastest pace in four months.
Markit’s survey of 5,000 manufacturers and service providers also showed that a significant revival in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged.
Chris Williamson, chief economist at Markit, said the surveys show there is “a strong likelihood of the near-stagnation turning to renewed contraction in the New Year unless demand shows signs of reviving.”
In a separate release, the European Union’s official statistics agency said retail sales rose by 0.4% in October, having declined by 1.2% in September. But the rise in sales was largely confined to Germany, where unemployment is relatively low, and declines were recorded in France, Spain and a number of other eurozone members.
Note: I am still travelling. Here’s the link to Markit Eurozone Composite PMI.
Euro Hits Two-Year Low The euro slipped to a two-year low with the latest dose of drab economic data bolstering expectations of further easing ahead of the ECB’s monthly meeting.
China’s official nonmanufacturing purchasing managers’ index rose to 53.9 in November from 53.8 in October, while the competing HSBC China services PMI rose to 53.0 from 52.9, according to data released Wednesday.
Link to HSBC China Services PMI