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