Plumbing and Mechanical

Natural gas, oil, diesel, copper prices drop but remain high with supplies tight<br>Week Ending Nov. 28, 2005

November 28, 2005
Tight supplies of oil and natural gas continue to push up costs for contractors and pose threats of shortages. In its daily update on damage from Hurricanes Katrina and Rita (www.mms.gov), the Minerals Management Service reported this afternoon that more than 30% of the daily natural gas production and 40% of the crude oil production from the Gulf of Mexico was still shut in, nine weeks after Rita struck. The U.S. has no government stockpiles of natural gas and almost no ability to increase imports. Therefore, if the winter is cold, more natural gas will be used for heating homes and businesses, potentially leaving factories and power plants short. Natural gas is used as a feedstock for polyvinyl chloride (PVC) pipe and a variety of other construction plastics, and for making glass and brick. It is also the sole fuel for most power plants built in recent years. The price of natural gas soared to more than $14 per thousand cubic feet (mcf) right after Rita hit. With production slowly climbing and the weather having stayed generally mild, the price for January delivery fell today below $12 per mcf but it is still more than 50% higher than a year ago.

Mild weather has also contributed to a drop in the price of crude oil, gasoline, and diesel fuel. Today the Energy Information Administration (www.eia.doe.gov) reported that the national average retail price of gasoline (all grades and formulations) fell to $2.20 per gallon and on-highway diesel fuel to $2.48 per gallon. Those prices are respectively 87 and 68 cents less than the record set after the hurricanes but are still 21 and 36 cents higher than a year ago. Gasoline prices have dropped more, both because demand normally falls after Labor Day and because consumers appear to have altered their driving habits and vehicle choices. In contrast, demand for diesel fuel is less price-sensitive. Users such as contractors have little ability to reduce their use of diesel fuel to power offroad equipment such as tower cranes and earthmovers, construction vehicles such as dump trucks and concrete mixers, or their demand for trucks that deliver materials and machinery to job sites. Moreover, diesel fuel is made from the same “fraction” of a barrel of crude oil as heating oil. Thus, if cold weather pushes up demand for heating oil, there is less diesel fuel available for construction, transportation, and other users.

Copper is another commodity that is selling for near-record prices. Today, copper futures on the Comex for March delivery closed at $1.91 per pound, down from a recent $2 level but roughly triple the level of two years ago. Demand from China and other industrializing countries, as well as strong consumer and construction demand in the U.S., have pushed up prices for copper pipe, wire, and other construction materials.

On Tuesday, the Bureau of Labor Statistics (BLS) provided an update on the employment effects of Katrina and Rita in reporting on nonfarm payroll employment by state in October. Seasonally adjusted employment climbed by 4,000 (0.2%) in Louisiana after plunging 240,000 (12%) in September. Construction accounted for more than 100% of the job gain in Louisiana, adding 5,100 jobs (6%) in October. The gain was large amounted to only one-sixth of the 30,600 construction jobs lost in September. Clearly, there is no “job stampede” to the hurricane zone yet. Construction employment for the month was up in 32 states, down in nine plus the District of Columbia, and unchanged (or within 100 of the previous level) in eight. Since October 2004, construction employment rose in 42 states, fell in seven, and was unchanged in DC and Alabama. The largest year-over-year percentage gains were in Idaho, 15%; Utah, 14%; Arizona, 13%; Nevada, 12%; and Oregon, 11%. The biggest declines occurred in Louisiana, -21%; Michigan and New Jersey, -2% each.

BLS reported on Wednesday that the number of mass layoff events (involving 50 or more workers at one site) fell to 1,088 in October from 2,220 in September, of which 817 were identified as potentially related to Katrina and Rita. The October figure was down 15% from October 2004. Construction layoff events totaled 88, down from 116 in September and 126 in October 2004.

Two further indicators that the housing market is cooling appeared in recent days. Today the National Assn. of Realtors reported that existing-home sales, including single-family detached houses, townhouses, condominiums, and co-ops, dropped 2.7% from September to October at a seasonally adjusted annual rate. The October level was 3.7% higher than a year before. The median price-the price above which half the sales occur-rose 17% over the past 12 months to $218,000. The percentage changes in sales rates and prices were similar for single-family homes and for condos and co-ops. The inventory of unsold houses of all types rose 3.5% from September 30 to 2.87 million on October 31, a total equal to 4.9 months' supply at the October selling rate. On Wednesday, the National Assn. of Home Builders reported that in the third quarter “a softening of the overall rental market has led to an acute decline in rental remodeling expenditures. Remodeling activity remains strong for owner-occupied units.” The results were similar for expected near-future activity.