Energy Inventories Soaring and Another Strong Consumer Report

- ISM Non-Manufacturing for April fell to 61.7 versus estimates of 61.0 and a reading of 63.1 in March.
- Summary of Weekly Petroleum Data for the Week Ending April 29, 2005.
- Crude inventories rose 2.6M barrels versus estimates of a 1.25M rise. Distillate fuel inventories fell 300K barrels versus estimates of a 575K rise. Gasoline inventories rose 2.2M barrels versus estimates of a 875K rise.

Bottom Line: The ISM Non-Manufacturing is holding just under the 62.4 average for all of last year. This is an exceptionally strong level, considering services account for 85% of the US economy. This is still near the all-time high that was set last year in April at 66.9. However, components within the index show a continuation of the recent deceleration is likely. Measures for new orders, order backlogs, inventories and employment were modestly weaker. Once again, another measure of inflation showed deceleration. The prices paid component of this index fell to 61.9 from 65.6 the prior month.

Home Sales are booming. Auto sales yesterday were the strongest in long time, especially considering the lack of incentives compared to prior months. Now, a report shows the largest part of the US economy, the service sector, is still very healthy. I continue to believe that US growth is slowing to more healthy sustainable levels. The case for a US hard landing is growing harder by the day.

OPEC’s daily production last month rose an average of 280,000 barrels from the prior month. This is the highest level that OPEC has pumped since October 1979. US supplies for crude are now near 6-year highs. With global demand falling, the US dollar firmer and supply at very high levels, I continue to believe we have seen the highs in oil prices for this cycle. As I have stated before, the contango that currently characterizes the oil futures market will result in a steeper decline than most expect once perceptions change. I expect crude to reach around $35-$40/bbl. sometime during the second half of the year and that it will average around $30-$35/bbl. during 2006. If I am correct, most energy-related companies will show very little earnings growth next year. Momentum and growth investors that have recently turned to commodity stocks will be very disappointed under this scenario.