Oil Is Running, How Strong Are It's legs?
James Bibbings, June 12th, 2009
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James Bibbings - Commodity News Center
This week (June 8-12) I was interviewed by several media sources regarding my thoughts on oil and the direction of gas prices at the pump. These are a few of the questions I was asked and how I responded.
Question: What happened in the last month that's prompted this increase in gas price -- and oil price for that matter?
Response: Over the past month oil prices have moved forward largely as a result of a flailing US Dollar. [The US Dollar Index declined just under 15% since its peak of 89.62 and its 2009 low of 78.33] Besides a weakening dollar, speculation that the Great Recession is nearly over has also turned sentiment on oil. These two factors, almost alone, have created the perfect bullish storm for crude prices. Rising crude costs have of course weighed heavily on prices at the pump.
Summer demand for unleaded gas and diesel is also adding to this run up, but only slightly. According to the EIA gasoline demand is still off 2.9% from this time last year; which was one of the worst driving seasons on record. Fundamentally, global demand for almost all commodities is still weak and this weakness is even more pronounced in the energy/petroleum markets. In fact, regardless of any recent gains, demand for oil is still at a 10 year low.
In response to this weak end user demand, crude refiners have been trying to reduce inventories on hand and have been importing less oil. This is primarily the reason for the Energy Information Administration's bullish inventory report today [Wednesday] which showed crude stockpiles down 4.4 million barrels to 361.6 million; better than the expected 700,000 barrel drop. It is also the reason the American Petroleum Institute reported a large draw on oil inventories Tuesday. So in saying this, it appears to me that overall supply is working itself out of the system, but not because of substantially increased demand or a scarcity of oil. Supply, is working itself out of the system because of low margins at refineries and weak consumer demand; very different from a truly fundamental supply and demand shift. [Later in the week news hit the oil markets of Valero closing a major refining operation in Aruba for this very reason]
Question: Will the two continue to move in tune with each other this summer?
Response: Oil and Gas will almost always move in tune with each other; that is unless there is a bottle neck at refineries. According to the EIA report out today [Wednesday], most refiners are currently operating near 86.5 percent of capacity; far from bottleneck. Since consumer demand doesn't appear to be coming back anytime soon, I don't expect crude oil and pump prices to decouple during the summer.
Question: Many are saying that gasoline is a lot cheaper than it was a year ago. There are also some supposed signs of economic recovery that would imply that demand for fuel will improve this summer...if I'm not mistaken that should contribute to a higher price for oil right?
Response: As I previously mentioned, we are not seeing a true improvement in oil fundamentals. No matter what the government or suppliers try to do or say, consumer demand is still very weak; period. I think it goes without saying that demand is likely to remain low until more people find work. Our now staggering 9.4% and rising unemployment rate strongly affirms this fact. [See my work from yesterday "Believe None Of What You Hear, Half Of What You See"] Consumers without jobs cannot afford gas over $3.00 a gallon, while at the same time refiners and oil producers cannot operate at prices much under $3.00 a gallon. How quickly people forget the record oil profits that were generated when prices were well over $100/barrel and how demand wilted as prices climbed over $3.00/gallon at the pump. Let us also not forget that this was happening when people still had jobs!
