The physical oil market is very weak

Front month crude continued to weaken today for the fourth straight day. Weakness was most pronounced in the front months as the 1st - 2nd month contango widened out to a massive $2 monthly spread implying a 33% annual yield for holding a front month short position. Clearly, the market is burdened by high inventories and is concerned about market conditions over the next few months.

This makes sense as onshore inventories are high (US onshore inventories well above 5year averages with Cushing at 32M bbls) and offshore inventories are even higher (140 M bbls in VLCC's floating offshore). What makes this worse is that OECD demand continues to deteriorate. Last week's EIA numbers showed demand down 3.2% yoy. While this is an ugly number, it is much worse when you consider that it is being compared to the last November when we were at the height of the financial crisis. The implication is that demand is DOWN 3.2% compared to the incredibly weak numbers of late 2008 when financial markets were crashing, consumers were paralyzed and credit markets were totally frozen. These are depressionary numbers and they portend weakness in the crude market for some time.

Unemployment is skyrocketing in the US, Spain, the U.K. and Eastern Europe. Unemployed people don't drive much and people who are fearful about their jobs don't go on long vacations or otherwise travel nearly as much as in a healthy economy. While governments are playing statistical games to make it look like unemployment is stabilizing, the real numbers are dismal with a huge and widening gap between reality and government numbers. The crude market is starting to adjust to this reality and this explains the weakness of the last few days.

The following piece from Anecdotal Economics details some of the games being played with US employment numbers. Unemployment is reaching depressionary levels with a realistic U-3 (official unemployment) of 15% and U-6 (unemployment including involuntary part-time work) of over 20%.

Six Degrees of Deception

“Lies, damned lies and statistics,” a quip of English statesman Benjamin Disraeli, was popularized by Mark Twain a century ago, and, well, for the early 20th century those categories more than sufficed.

In a vastly more complicated 21st century however, we find more shades of gray, more nuance necessary, and so we comment today on the Six Degrees of Deception, an upgrade from the mere three with which we made do for so many decades. The original trio remains intact, of course, but we embellish those with several more categories, namely “White Lies” to precede the three and “Government Statistics” to follow.

The Sixth Degree of Deception we will save until last, as our real focus today is lying’s fifth circle of hell, Government Statistics, namely the award-worthy work of fiction published Friday by the Bureau of Made-Up Labor Statistics known as the Employment Situation for November 2009. It depicts, fairy-tale-like, a U.S. U-3 Unemployment Rate of 10.2 percent and a broader U-6 rate of 17.0 percent, when, in fact as we illustrate below, the true unemployment rates are more like 15.5 percent (U-3) and, when including involutary part-time workers, 21.2 percent (U-6), which certainly are more Depression-like numbers.

Friday, December 4th, we reliably were informed, the U.S. economy, in the midst of the worst recession since The Big One in the 1930s, shed a mere 11,000 jobs, well below the 130,000 expected by forecasters and, by nearly an order of ten, the 169,000 private-sector jobs lost according to the ADP National Employment Report issued two days earlier, and a 23 rd consecutive month of declining employment.

According to the BLS, the Government sector created 7,000 jobs in November. Adjusting accordingly, it implies 18,000 private sector jobs were lost last month, an absurd, happy-face estimate which bears no resemblance to ADP’s more realistic assessment of reality. BLS also managed to refine its estimates of job losses in September and October, utilizing its own formulas of revisionist history, in which it now pretends far fewer jobs were lost than originally reported.

September’s Employment Situation guessed 263,000 jobs disappeared into the recession’s depths when first reported in early October, was revised upward to -219,000 a month later, and, to make the deception complete, revised upward again in the November report to -139,000, almost half as many job losses than first thought.

October’s Employment Situation originally pondered the loss of 190,000 positions, only to be pleasingly reworked this month to show 110,000 fewer jobs. At this pace, when December’s Employment Situation is released early next year, October may be upwardly revised to fewer than 50,000 job losses and, to maintain the illusion, November almost certainly will be upwardly adjusted to a positive, jobs-created, number.

The manipulation is breathtaking, particularly the fiction of jobs being created by new business creation (the Birth/Death Model adjustment), a convenient “plug” number designed to estimate the number of businesses being formed or closing – and the resulting jobs created or destroyed in the process. The Birth-Death Model employed by the Bureau of Labor Statistics fabricators statisticians clearly is nothing but a mechanism by which desired employment situation outcomes can be constructed. As evident in the chart below, from Jesse’s Café Américain, monthly Birth-Death adjustments are positive every month save January, and vary little month-to-month over the last six years, despite nearly two years of brutal recession and record-setting unemployment data.

In November, the Birth-Death Model added 30,000 jobs, and in April-May-June this year, it helped fertilize all the green shoots with a combined 630,000 new jobs created by intrepid Americans fed up working for The Man (or not working, as likely was the case) who, supported mentally and financially by loving spouses or family members, threw their hats into the deep end of capitalism’s pool by starting a new business, hiring themselves, and others, presumably, in the process.

Not.

This is data of convenience, designed to achieve political ends. When interested parties wanted to pass a near-trillion-dollar stimulus program in February, the employment situation suitably was grim. Once-passed, the data rapidly began improving. Now that 2010 mid-term elections are months away, the employment situation magically is darn-near robust, and no doubt will be upwardly adjusted to further robustness in months to come. Tell that to the record number of people – 5.9 million at last count if that data point can be believed – who now have been unemployed more than 26 weeks, half a year, and who are helping to rapidly deplete state unemployment insurance coffers.

Our favorite manipulation, however, centers around the manner in which the U.S. population is categorized in BLS-world, as in who is working, who isn’t working, who has stopped looking for work and who want to work, and bears witness to the astonishing manner in which data can be rearranged to suit to the objectives of those with a vested interest in the outcomes.

The deception lies in who BLS conveniently counts as employed and unemployed and how they are counted. Two areas for mischief jump out: “Persons Who Currently Want a Job (PWCWJs),” a 6.0 million subset of those Not In Labor Force (the NILFs*…see definition below) and those “Marginally Attached” to the workforce, a subset of PWCWJs. Persons Who Currently Want a Job are those able and willing to work, but who temporarily have left the Labor Force for any number of reasons. Sounds like “unemployed” to us.

In November, according to the BLS monthly cookbook, 2.3 million people were “Marginally Attached,” and of those, a record 861,000 officially were “Discouraged,” meaning in BLS terms they no longer are counted as Unemployed (part of the Labor Force), even though of course they were unemployed, but, being so discouraged, they had not looked for work in the last four weeks because “they believe no jobs are available for them.”

We reviewed BLS data from November 2004 to May 2007 (30 months) and from May 2007 to November 2009 (30 months) to establish some trends in both periods, as depicted in this table. From November 2004 to May 2007, the Labor Force – new entrants by age or immigration – grew on average by 149,100 each of the 30 months, Employment advanced by 189,400 a month, Unemployment fell and NILFs increased by about 86,000 a month over the time period.

From May 2007 to November 2009, however, the Labor Force increased only by 37,200 a month according to BLS, the number of Employed declined nearly 250,000 per month, Unemployment, of course, increased dramatically, an average of 285,000 each month over the 30-month span, and the NILFs grew by 138,000 a month.

When we adjust the November 2009 data (hey, we can make up numbers as well as the government) to account for a more realistic growth of the Labor Force over the last 30 months, which almost everyone including Ben Bernanke acknowledges is growing by at least 100,000 to 125,000 entrants per month (not the measly 37,200 per month fantasized by BLS), add the “Discouraged” subset to Labor Force and Unemployed and reduce the Persons Who Currently Want a Job fudge category to November 2004 – May 2007 levels (about five million), we find a much different “employment situation.” (Chart Column: More Realistic Nov-09)


U-3 “headline” unemployment increases to 12.9 percent and U-6 unemployment, which includes involuntary part time workers and the rest of “marginally attached” cohort, jumps to 19.4 percent.

But wait…There’s More. Let’s roll the Marginally Attached into the Labor Force and Unemployed because, after all, they really do want to find jobs and they’re able and willing to work. Now the U-3 unemployment increases to 13.6 percent and U-6 unemployment, which includes involuntary part time workers remains at 19.4 percent. (Chart Column: Even More Realistic Nov-09)

And More. When we include the rest of the Persons Who Currently Want a Job (3.688 million) in the Labor Force and Unemployed because, after all, they really do want jobs and they’re able and willing to work, we get the most realistic view of unemployment in America, numbers starting to approach Great Depression levels and a more reliable indicator of how badly the employment situation has deteriorated.

U-3 unemployment leaps to 15.5 percent and U-6, including the involuntary part-timers advances to 21.2 percent, scary numbers indeed if in reality one in five Americans willing and able to work cannot find full-time employment. (Chart Column: True Employment Nov-09)

For a much more hilarious discussion of how BLS classifies Labor Force Participants, NILFs, the Employed and Unemployed, see Mint.com's YouTube explanation "Are You Unemployed" below (courtesy of Mish's Global Economic Trend Analysis).

And, as we continually have observed, those unemployed and underemployed tend to make lousy consumers and borrowers, and will for years to come as we progress through our own self-made, Japanese-style lost decade or two of sluggish economic activity, growing disparity between wealthy and other-than-wealthy, massive tax increases applied to a resentful populace able to pay taxes (primarily the wealthy, but wage-earners as well), steadily increasing federal government debt well beyond the best-case hopes of the Hoper-in-Chief, and continued eroding equity market values as money, including what’s left of the retirement funds of the Baby Boomers, is recycled into the perceived “safety” of government bonds, all spinning vicious-circle-like downward to some miserable equilibrium manifested in a much lower standard of living for just about everyone except Bill Gates and Warren Buffett and 398 other people on the Forbes list.

Bottom line, by manipulating the number of people allocated to the Labor Force (Employed and Unemployed) and the NILFs, BLS conveniently can make the monthly Employment Situation politically more palatable, which is why Government Statistics is the lying’s fifth circle of hell which fewer than one in a hundred in this country understand. Government Statistics certainly deserve a prominent place in the Six Degrees of Deception, to a degree which never could have been envisioned a century ago by a cynical and caustic Mark Twain, and the BLS Employment Situation is but one of the many ruses upon which markets gyrate and politics is practiced, so don’t even get us started on the topic of fictional GDP estimates.