Stocks are higher this morning as oil prices ease. Bonds and MBS are up small.
More and more oil is getting out of the Middle East which is helping push prices lower. The blockade on Iranian oil is working and insurance rates are falling. Current transit rates are around 13.5 million barrels per day through the Strait, which is around 80% of pre-war levels. It had fallen to around 6 million barrels per day during March and April. The Saudis have diverted some of their production to pipelines which reach the Red Sea, which is also helping.
Diesel fuel is still elevated, however that is a refining issue more than a crude oil issue. This is particularly an issue in the West Coast where refineries are cutting / shutting down due to onerous environmental restrictions. West Coast refining capacity has fallen some 30% over the past 5 years. Diesel costs flow into all sorts of prices.
Ever since the beginning of the energy prices have seen a double whammy, from rising crude prices and rising crack spreads. The increase in crack spreads (i.e. refining margins) have blown out this year:
Like mortgage rates are a function of the Treasury rate and the MBS spread, gasoline and diesel prices are a function of the oil price and the crack spread. So the issue is a function of refining capacity and oil prices. Since diesel and heating oil are the same thing, East Coast refineries are diverting production to heating oil stocks, which means less diesel. So falling oil prices are encouraging, however they aren’t the whole story and investors hoping for a bond rally on falling crude prices might be disappointed.
The services economy expanded in September, albeit at a slower pace according to the ISM Services Report. Business activity decelerated as did new orders. Employment picked up and prices continue to increase. Exports fell pretty dramatically.
The Prices Index was above 70 for the sixth time in 7 months and hit the highest level since 2022. Energy is the main driver here, especially diesel.
“Tariffs and fuel cost impacts were the most cited issues impacting respondents’ supply chains; in fact, fuel costs were mentioned twice as often as any other single issue impacting performance. Supply chain constraints were also a top concern of respondents and were impacting both lead times and costs. The Employment Index’s first reading above 50 percent in three months seems to have resulted from increasing backlogs, as well as high levels of business activity and new orders. Although business activity and new orders growth rates have eased a bit, the Backlog of Orders index hit its highest level since July 2022 (58.3 percent).”
National rent growth declined in September, according to Apartment.com. The national average rent declined 0.08% from August to $1,752. The West and the South are struggling, while the Midwest and Northeast are a bit more balanced. There was a lot of apartment construction over the past 5 years, and most of it was in the Sunbelt and the Southeast.
A lot of apartment rehab projects were started during the COVID years and these newly refurbished units are competing with new buildings that are offering heavy incentives to lure tenants. These projects were financed with 5 year bridge loans which are coming due. It is going to be hard to refinance these projects given current rates and rent levels. We could start to see some pressure in the resi CLO space.
Berkshire Hathaway picked up more stock in Lennar. It now owns 12% of the company. Berkshire is big in the homebuilding space, owning Taylor Morrison and Clayton. It also has stakes in Lennar, NVR and D.R. Horton. Like mortgage banking, homebuilding is highly cyclical and we are at the nadir of the cycle.
