Wednesday, June 3, 2009

Oil: Supply Up, Demand Down

And why are people bullish on oil? If your answer is the dollar, then short the dollar.


CNN Money:

Oil prices extended their decline Wednesday after a weekly government inventory report said crude supplies rose unexpectedly. Light, sweet crude for July delivery fell $1.37 to $67.18 a barrel by 10:48 a.m. ET. Oil had traded down 75 cents just prior to the report's release.

In its weekly inventory report, the Energy Information Administration said crude stocks increased by 2.9 million barrels in the week ended May 29. Analysts expected oil supply to decrease by 2 million barrels, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.



U.S. fuel demand fell 900,000 barrels to 17.7 million barrels a day last week, the biggest decrease since the week ended Jan. 9, the report showed. Gasoline consumption slipped 518,000 barrels to 9.02 million.

The peak U.S. gasoline demand period lasts from late May’s Memorial Day holiday until Labor Day in early September, as Americans take to the highways for vacations.

It was surprising to see gasoline demand drop, because of the Memorial Day holiday,” said Mike Zarembski, senior commodity analyst at OptionsXpress Holdings Inc. in Chicago. “It’s probably a sign that consumers are cutting back on driving because of the run-up in retail prices.”

Source: EIA


  1. Weaker dollar + OPEC cuts since September starting to bite + Tight credit / decline in year-on-year cash flow for producers affecting future exploration + hurricane season.

    Whether or not you're using commodity exposure as a currency hedge, there is NO WAY around the fact that it's a global commodity priced in dollars. Sure, there are days of divergence between the relationship of the dollar and WTI, but directionally it will move together.

    OPEC cuts of 4.2 million bpd (* 80% compliance) since September are taking hold. Globally, industrial demand and consumer demand are off as the consumer has limited access to cheap money for goods and services (No more HELOCs to pay off the credit cards, the only cheap money is for real estate and you better have good credit and a considerable down payment). Industry is using less energy. Federal Reserve pegs industrial output as 69.1% capacity if I recall. So goods aren't being transported. That lowers demand too. People aren't driving as much despite the 30% discount on pump gas over 2008. This answers the "yeah but" on why there's so much working crude inventory. Demand decline has offset the OPEC cuts, but the physical commodity doesn't spoil. It's also relatively inexpensive to store, so fill up the tankers and let's bet on contango.

    Why bet on contango? Point three: Today's decline of new exploration due to tight credit and lower year-on-year cash flow will show up in lower supply in future. If there is a three-year lag or so for this to appear, why is it showing up now? Crude is

    Potential tax changes also loom on the horizon which would trim royalties.

    As far as shorting the dollar? Commodity exposure offers a psychic comfort that the paper trade does not have as an inflationary hedge. Low margin, too. This is not a play for the individual, but for the big boys -- the same players who are willing to pay storage costs in tankers to bet on the contango.

  2. points taken...

    friendly bet that oil crosses below $50 a barrel within 4 months?

  3. Ha. I'm on the same side of that trade. Seasonality favors the oil bears throughout the summer, and my seat o' pants probability is probably 60/40 that we'll dip under $50 again after July 4th and before Labor Day.

    The mythic green shoots shall likely fail to sprout over the summer as economists and traders alike realize that slowing contraction is not growth, but actually worsening contraction.

    I see some dollar strength coming on euro weakness, too. That helps the bears.

    The bullish case off of the top of my head: A direct hurricane hit or something crazy on the geopolitical front -- Israel bombs Iranian nuclear sites -- and we could go to $80 quickly. Or China could further ramp up their physical commodities shopping spree.