David Gaffen

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Goldman Sachs Does Not Consume Diesel Fuel

July 14, 2009

Sure, things look rosy for Goldman Sachs (GS.N), but the firm hardly represents the broad U.S. economic situation, as investors are looking over a mélange of lousy data, with dribs and drabs of mildly encouraging information in the mix.

Goldman Sachs headquarters building in New York. REUTERS/Lucas Jackson
Goldman Sachs headquarters building in New York. REUTERS/Lucas Jackson

Tuesday’s retail sales figures weren’t all that great – the strength comes from auto sales and rising gasoline prices (and rising gas prices aren’t exactly great for consumers) – and Wednesday’s data on capacity utilization and energy inventories are likely to confirm the ongoing slack in the economy.

So what to make of the statements from CSX Corp. (CSX.N) chief executive Michael Ward, who told Reuters the worst of the recession has been seen? Data on capacity utilization doesn’t suggest a pick-up in demand, and the giant inventories of distillate products in various parts of the country also suggest the economy is sputtering, not chugging.

Weekly data on energy product inventories will be released Wednesday. Notably, distillate stocks – that’s diesel fuel, jet fuel and heating oil – were at 158 million barrels as of the July 3 week, or about 55 million barrels above normal. Of particular interest is the inventory of low-sulfur diesel located on the western U.S. coast. Refining production has been in decline here over the past year, but inventories have not been drawn down to any great degree.

In a strong economy, stocks would likely fall – but they’re not, despite declining refinery output, because of slack consumer demand for imports that come into Pacific ports. “If we’re not seeing a material drawdown in supply, I would think that’s indicative of weakness in overall demand in the market,” says Stephen Schork, who writes the Schork Report, an energy market newsletter. “We’re simply not manufacturing this stuff right now.”

Data on rail traffic is no more encouraging, with North American rail freight down 20 percent in the first half of the year when compared with 2008. Ward of CSX predicted that third-quarter volumes will fall by double digits, but the pace of decline will be lower than this quarter, when it reported a 21 percent drop in freight volumes. So we’re back to the second derivative again – the rate of change may be improving, but the underlying numbers are still negative. Another quarter or two, and we’ll see if the economy is picking up steam, or if Michael Ward was blowing smoke.

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