Friday, August 21, 2009

Oil Price vs. Reserves

Reuters details on the reason for Wednesday's jump in oil:

U.S. stocks rebounded and oil closed above $72 a barrel on Wednesday after data suggested a recovery in U.S. oil demand, a surprise for investors who earlier were fretting over a sharp slide in Chinese equities.

A U.S. government inventory report showed a huge drop in crude supplies last week, boosting oil futures by more than $3 a barrel and lifting Wall Street sentiment that had turned dour after a 4.3 percent a drop in the Shanghai Composite Index .SSEC.

But oil reversed early losses after the U.S. Energy Information Administration (EIA) said crude stocks fell by 8.4 million barrels last week, confounding analysts' expectations for a rise of 1.3 million barrels.

"I think these (demand) changes are reflective of an improving economy, but one must be cautious because these changes are versus year-ago weak numbers," said API chief economist John Felmy.
Now, a little perspective. A large decline? Yes. But reserves are still up dramatically year over year.

The relevance? The relationship between the change in these reserves (shown inversely below) and the price has been rather strong going back 4+ years. That is until the global financial markets began their rebound in March.

But where is all that demand coming from? Back to Reuters:
The decline in crude stocks was caused by rising production in refineries but also by a sharp drop in oil imports, with traders holding more inventories in tankers offshore as they await higher prices.
So is it increased end user-demand (which combined with a weak dollar makes a great story as to why oil could/should rise) OR is it just a technical reaction to traders hoarding oil? The answer to that question goes a long way in determining the future directoin of oil.

Source: EIA


  1. Jake,

    So is it increased end user-demand......OR is it just a technical reaction to traders hoarding oil?

    It's hard for me to believe it's end demand. People are tapped out.

    When it comes to assets (oil & commodities are now Main St. asset classes via ETFs), rising prices create speculative demand. And senseless central bank money creation fuels the speculative demand.

    In the exponential credit growth eCONomy, final/true end demand is a joke. Take housing. During the housing bubble we built millions and millions of homes for which there was no end demand. How do I know? Simple - the number of unoccupied units soared to just under 20 million (15% of the housing stock)! It was all speculation (and greed). But NO one could see it coming.

    Be it inflation, deflation or both, I'm quite certain Bernanke's casino eCONomy will make the majortiy poorer.

  2. Izabella Kaminska at FT Alphaville is one of my fave bloggers on energy. Here's a relevant post from yesterday.

    Izzy quotes Edward L. Morse to the effect that OPEC spare capacity was the key factor in last year's price explosion (a line The Economist also took if I recall correctly). Morse also believes newly discovered reserves will keep a lid on prices. (Morse's article is behind a pay wall at Foreign Affairs.)

    mab, if you want to understand how financial markets are interacting with energy prices you really should be keeping up with Izzy but it's daunting, highly technical stuff for the most part though the above post is not.

    Also mab, you may want to consider how much money was destroyed in the collapse of asset prices and the shadow banking system, and compare that to the relatively small quantities involved in "senseless central bank money creation" as you put it. Check the following post for a start.

  3. Just came across this: "High prices now are becoming the justification of high prices." That's oil analyst Stephen Schork, on Bloomberg TV & radio this morning. The discussion focuses on how financial markets are interacting with commodities lately, and Schork uses some entertainingly blunt language. Tom Keene gives a shout to the Morse article Izzy picked up on.

    The podcast should be up later today. Here's a link for the video.

  4. I have absolutely no idea where oil is going. If anything the oil market is all over the place. 140 to 30 back to 70. Some famous tech analyst is now predicting oil at 10$ lol.
    All I can do is refer to asset allocation 101. When the economy is in the doldrums buy cyclicals and sell commodities!