Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
BEA Revises Q2 2016 US GDP Growth Upward to 1.42% - 29th Sept 16
Could the OPEC deal set stage for the Next Stock Market Risk Rally? - 29th Sept 16
Why Trump Lost, Hillary Won the 1st U.S. Presidential Debate - 29th Sept 16
Is a Dollar Crash Imminent After the Senate Overrides Obama Veto on Saudi 9/11 Bill? - 29th Sept 16
2017: Gold and Silver's Year of "Public Recognition" - 29th Sept 16
Did Trump Win the 1st US Presidential Election Debate? - There's Something Happening Here... - 29th Sept 16
FED Goes from ZIRP to NIRP! - 29th Sept 16 - Chris_Vermeulen
Here’s Why You Should Be in Cash Right Now - 28th Sept 16
The Fed Put a 50% Tax on Your Retirement Plan - 28th Sept 16
Massive Chinese Debt And Why They Are On A Gold Buying Binge! - 28th Sept 16
Stocks Commodities and FX Markets Waiting Technically While Fundamental Data Neutral Poised - 28th Sept 16
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Two Culprits in the Oil Demand-Pricing Disconnect

Companies / Crude Oil May 20, 2012 - 07:45 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDr. Kent Moors writes: As we wait for a "floor" in the price of oil, the pundits continue to talk about declining oil demand in the U.S. and Europe.

But the figures are beginning to tell us something very different – at least on one side of the pond.


The American Petroleum Institute (API) released data today that indicates "petroleum consumption" in the U.S. declined by 0.3% in April from levels one year ago. Meanwhile, gasoline demand actually grew for the third month in a row, although by only some 1%. It had been up 3% in March year-on-year.

Demand for distillates (diesel, low-sulfur content heating oil) also increased.

So where is the decline that everybody wants to talk about?

It turns out to be in jet fuel (high-end kerosene), which was down 3.2%.

Now, the analysts are quick to call the gasoline gain this month "tepid." And they point out that millions are still out of work with unemployment above 8%. What they fail to take into consideration is the overall upward trend in consumption, even with the employment and economic concerns.

The prevailing argument fails to consider that the demand level will accelerate once the economic recovery picks up. If the current environment remains weak, and there are still demand gains in the oil products most directly affecting overall price, what will happen when the recovery returns in earnest?

A "tepid" 1% rise per month is still 12% a year – and that would require considerably more domestic drilling.

That is due to a revolution of sorts in the production landscape.

Imports of crude oil this year are likely to continue declining; reversing what had been an increasing reliance on foreign oil to satisfy need in the American economy. In April, for example, 55.8% of crude used in the U.S. came from exports, down from 61.3% in April of last year.

And according to projections, less than 50% of our requirements will come from imports by as early as 2015, with only 30% needed within 15 years. Those imports would come almost exclusively from Canada.

To put this into perspective, only three years ago, we were expecting that 70% of American requirements would come from foreign countries.

The difference now is the rise in the domestic availability of unconventional oil – shale, tight, heavy, bitumen, oil sands – in volumes that have completely changed the production landscape.

Still, that alters neither the aggregate price (unconventional costs more to produce on average and certainly more to process) nor the demand projections.

Elsewhere, the demand picture is intensifying.

Not in Europe, of course, where a combination of Greek, Spanish, Italian, cross-border banking, German economic concerns, and a rising opposition to austerity measures have combined to depress demand (and spirits).

Neither the North American nor the European markets are determining global prices these days. The developing and industrializing nations are in the driver's seat now. Despite recurring concerns about Chinese or Indian economic expansion, and recent OPEC and International Energy Agency (IEA) revisions in global demand projections, we will still come in this year with a 1.8% gain and an 89-million-barrel -per-day average.

So, if this is the "big picture" (and it is hardly new), why have crude prices in the U.S. declined 15% since their most recent high at the beginning of March? If demand is in fact increasing, albeit slower than the TV talking heads would like, why are prices moving in the opposite direction?

There are two – very different – answers here.

1) Headlines are Telling Us the Wrong Story

First, perceptions of demand moving forward are prone to reading overemphasized deflation concerns into every headline.

  • Greece is without a government (was it that different when they apparently had one?);
  • Spanish banks are under renewed pressure;
  • Germany faces concerns on the prospects for ongoing growth; and,
  • France voted in a socialist president whose plane was hit by lightning almost immediately after (perhaps a divine comment on an election result?)
  • And oh yes, a certain American investment bank lost a few billions riding derivatives in the wrong direction.

But none of this has anything really to do with demand projections in the U.S. or, for that matter, elsewhere in the world.

The European contagion is becoming an isolated situation, at least for now. The decline in the euro against the dollar is actually helping to improve the American export picture for finished products and even services.

As for the JPMorgan mess, it may breathe new life into government proposals for more oversight. Still, this has absolutely nothing to do with oil.

2) Short Sellers Setting Up for Big Gains

Second, and this is what has prompted a longer slide than would have happened otherwise, this has been an excellent opportunity for large short positions to profit from the declining oil price.

Now, there was a brief decline coming anyway, because oil had overheated.

However, given the defensive nature of the current market, the shorts can be ridden longer than usual, and a greater profit can be made than anything that's justified by the actual market specifics. That this also drives down the stock value of companies throughout the energy sector into "oversold" territory merely provides additional incentive to keep those shorts in place.

After all, even if the market would change abruptly, covering the shorts is still much cheaper than it was two weeks ago.

When the run has petered out, these same guys will be on the other end of the transactions pushing the prices up. That's just how this works.

So what's next?

We will continue to experience sluggishness in oil prices until the dust settles, and the profit incentive moves to the other side of the ledger. Then we will see hedging in a different direction, along with a rather quick rebound in prices.

In any case, this is a long-term market, subject to bouts of very short-term volatility.

Nothing happening in Europe or on the trading floor is going to change that.

Sincerely,

Kent

P.S. By the way, last Friday, Iraisedmy target price for oil – significantly.

But if you missed it, a major event is now just six weeks away that will have profound effects on the market. And oil at this target level is set to have significant effects worldwide – many of which the world is not prepared for. Yet the most significant effect of all – for you, anyway – will be the extraordinary amount of money this situation is likely to create.

Here are my new projections.

Source :http://oilandenergyinvestor.com/2012/05/two-culprits-in-the-oil-demand-pricing-disconnect/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife