It's Turning Into A Rough Friday For The Stock Market

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US Oil Demand Has Peaked And Oil Markets Don't Care [CHART]

There are lots of reasons for Americans to use less oil. 

They'll improve the environment.

If it involves driving less, they'll save lives.

And in the long run, they'll save money.

But a collective reduction in fuel use is not yet enough to put a long-term dent in global oil prices.  

Here's a chart from AllianceBernstein's Bob Brackett charting crude prices (red) versus U.S. oil demand (green —as measured by petroleum supplied).

The green line goes down.

The red line does not:

Bob Brackett/AllianceBernstein

Brackett says this shows "a price elasticity imposed on top of a longer trend."

That larger trend: U.S. oil demand has peaked:

We never see a return to peak demand of the mid-2000s. We have passed "peak oil" demand for the U.S. by more than 2 million barrels per day. The large shift as oil prices spiked was structural, especially for non-transport use (i.e., residual into power). For transports, it was partly structural (driving less) but also secular (efficiency gains).

Rather, oil remains a global commodity whose prices will be determined by demand from all over.

Like China, for instance.

Here's Brackett's from a note a couple weeks ago on this:

Our forecast for China's oil demand growth remains above consensus estimates, consistent with
our long-term view on price (which, as we wrote earlier this week is bullish —ed). Based on our analysis of vehicle growth in China and likely improvement in fuel efficiency, we expect oil demand will increase to 12.9mmbpd by 2018. This remains 0.9mmbpd above estimates from the IEA and is a further reason we remain constructive long term on oil demand and oil price. Overall we expect China's oil elasticity to remain at about 0.7x GDP over the next 5 years.

Our expectations for paying less at the pump should probably be the thing that more closely tracks U.S. demand.

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NOMURA: Chinese Growth Could Fall Below 7% In The Second Half Of This Year

$('.icon-tooltip').tooltip();China's gross domestic product (GDP) growth could slide below 7 percent in the second half of the year, warned Nomura, highlighting that downside risks to the world's second largest economy's outlook have risen "significantly" in recent weeks.

Tighter liquidity conditions and minimal support from policymakers, coupled with weakness in external demand, pose a threat to the country's growth trajectory, according to Zhiwei Zhang, chief China economist at the investment bank.

Nomura has assigned a 30 percent probability to the scenario unfolding, noting that its current base case is for growth to slow to 7.4 percent in the third quarter and 7.2 percent in the fourth quarter.

(Read More: This China Downturn May Be the 'Most Drawn-Out')

"Official total social financing has tumbled in recent months. We believe the series of policy tightening measures applied to the shadow banking sector in the past three months has reached a critical mass, such that deleveraging in the banking sector is happening," said Zhang.

"Liquidity tightening can be very damaging to a highly leveraged economy. Many local government financing vehicles rely on new debt issuance to pay the interest on their outstanding debt because they are operating-cash-flow negative," he added.

Total social financing, a broad measure of liquidity in the economy, fell to 1.2 trillion yuan ($195 billion) in May from 1.7 trillion yuan in April and 2.5 trillion yuan in March, according to Nomura.

Henry Paulson, Chairman of the Paulson Institute and Former U.S. Treasury Secretary said China needs to make significant changes to its economic model in order to continue to be successful.

As financing costs rise, it will make it difficult for local governments to sustain their projects, which in turn will weigh on fixed asset investment in the coming months, Zhang said.

And, with policymakers appearing to be more tolerant of lower growth rates, he believes it is unlikely the government will step in with stimulus.

Last weekend, for example, Premier Li Keqiang said current economic growth was within a "reasonable range" in spite of a recent slew of disappointing economic indicators including trade data for May, which, showed exports growing just 1 percent from a year earlier and imports sliding 0.3 percent.

(Read More: China Data Highlights Weak Economy, Remedies in Focus)

Weakness in external demand is the third factor that could limit growth in the mainland, Zhang said.

"Emerging markets face downside risks as the potential Fed exit from quantitative easing has led to capital outflows from these economies. China's exports depend increasingly on emerging markets, hence a slowdown in these economies poses a risk to China's growth outlook," he said.

Over the course of the second quarter, investors have become more wary about the outlook for China's economy, with key manufacturing and export sectors increasingly exhibiting signs of weakness.

This had led to a slew of downgrades by banks, with Morgan Stanley the latest to lower its annual growth forecast for China to 7.4 percent this week. China's official target for the year is 7.5 percent.

This story was originally published by CNBC.

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The Markets Are Pricing In An Autumn Fed Tapering That The Economy Isn't Ready For

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Recent PostsAll Signs Suggest This Is The End Of The Stock Market RallyThe Fed Has Gotten Itself Into An Interest Rate PickleThis Week's Volatility Reflects A Major Change In The Market's TrendIn our view the markets have gone too far in pricing in an autumn reduction of the amount of the Fed’s bond-buying program.  Investors are assuming that the economy is growing at an accelerated pace, and therefore jumped on Bernanke’s response at a press conference that the Fed could begin lessening the rate of buying in the next few months.  The result was a drop in stocks and a sudden significant rise in bond yields.  We note, however, an extremely relevant caveat, namely, that the Fed Chairman stated that such a reduction would take place only if the economy improved in a “real and sustained way.”  The problem is the strong likelihood that it is not going to happen since economic growth, rather than accelerating, is, at best, slogging along at a 2% growth rate, and, at worst, something less. 

The rate of inflation has also been coming down, yet another reason not to tighten too soon.  The Fed’s favorite inflation indicator, the PCE deflator, has gone up only 1.1% from a year earlier.  Furthermore, we think that Bernanke did not have in mind a quick 50-basis point rise in bond rates that would wreak havoc on the economy, and may do something to rectify that at next week’s press conference following the regularly-scheduled FOMC meeting.  That would be in keeping with the Fed’s past history of recalibrating its statements when they have resulted in unintended consequences.

The problem is that stocks will not be helped by any hints that the Fed will not pull back on its purchase program as soon as investors believe.  Not only does the domestic economy remain soft, but the global economy continues to slow down as well.  The World Bank has now followed the IMF in reducing its estimate for global growth.  Japan’s easy money policy as well as China’s falling imports has hit the economies of emerging market nations.  It sees a deeper than expected recession in Europe and a slowdown in some emerging markets.  Industrial commodity prices have been declining and a large number of emerging nation stock markets have taken nasty tumbles.  In addition emerging nation’s currencies have started to weaken, and, ominously, a couple of them have already taken steps to tighten monetary policy.

As for the U.S., the so-called economic acceleration that is supposedly taking place is far from evident in the numbers.  Although the payroll employment number for May was higher than expected, it was still well below the average of the prior six months.  In addition, both average weekly earnings and hours worked were flat, a negative sign for income growth in the period ahead.  Corporate hiring plans still remain weak. 

Similarly, the perceived strength in consumer spending is also a case of wishful thinking.  The latest monthly report shows declines in consumer spending of 0.2% and disposable income of 0.1% along with a savings rate of only 2.5%.  Combined with the lack of growth in disposable income, wages, hours worked and hiring, the outlook for consumer spending remains tepid at best.  Also adding to the economic malaise is the lowest reading in the ISM manufacturing index since June 2009 and weakness in the majority regional of ISM and Fed regions.

All in all, we think that economic growth will remain too sluggish for the Fed to cut its bond buying program as early as investors believe.  However, we think that rather than reigniting the upward trend in the market, the focus of investors will shift to the weak economy and the disappointing earnings that are likely in the second half.  The guidance being issued by an unusually large number of corporations already points in that direction. In our view there is a good chance that the market high for the year has already been made.

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The economy isn't strong enough yet.

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