Sagging Crude Usage Leads To Lower Oil Prices

From the Wall Street Journal:
NEW YORK--U.S. crude futures tumbled Wednesday despite a surprise decline in U.S. oil inventories as worries about fuel demand and Europe's debt crisis weighed on prices.
Light, sweet crude for November delivery recently traded $2.01, or 2.2%, lower at $89.36 a barrel on the New York Mercantile Exchange, after falling as low as $88.95/bbl following the inventory data.
Brent crude on the ICE futures exchange traded $1.76 lower at $108.69 a barrel.
The U.S. Energy Information Administration said crude-oil stockpiles fell by 2.4 million barrels in the week ended Sept. 21, surprising analysts that had called for a 1.1-million-barrel increase.
The stockpile drop was due primarily to a sharp decline in oil imports, which fell 7.6 million barrels, the lowest level since December.
But even as supplies fell, a measure of demand known as products supplied also dropped as refineries cut back on their utilization, suggesting that the oil-price drop is due to signs of sagging fuel usage.
"There's disappointment that refinery demand for inputs didn't perk up," said Tom Pawlicki, an energy analyst at brokerage EOXLive. "It may be that the refiners don't see demand picking up either."
Four-week demand for fuel products fell to the lowest level since April 6.
Weaker data on U.S. fuel usage comes amid continuing worries about Europe's debt crisis. Spain roiled markets following calls for early elections in Catalonia and a decision by the Spanish prime minister to restrict early-retirement programs.
 My view:

As a market watcher and analyst, it is interesting to see the decline in oil prices despite the announcement of Quantitative Easing to infinity by the Bernank.

It is quickly becoming apparent, that Draghi and Bernanke, who purport to be central bank wizards and wonder workers, are unable to affect lasting growth in the economy despite four attempts at QE.

While oil speculators can contribute to some upward pressure on the markets, the longer term debt deflationary picture is forming in much more certain terms as governments fail to boost the economy while containing their deficit spending.

It remains my assertion, that crude prices (WTIC) will continue to drop for some time, eventually reaching into the mid 60 dollar level, with even lower prices possible by the end of 2013 and into 2014.

If my view is correct, and it certainly depends on no major conflict breaking out in the Middle East, it would have substantial implications on energy stocks as they tend to move with the price of oil.

If production projects are postponed due to low prices, a pinch point could come down the road as supply capacity dries up.

Such a consequence would then boost prices and capacity investment would then be encouraged once more.

In the intermediate time frame, my strategy is to focus on some inverse energy producer plays to hedge against continuing price declines.

So far ERY has been quite appropriate in this recent environment.

While leveraged ETFs have a high erosion rate, if the downtrend is long and sharp, it could be a useful tool for a perhaps a few weeks or months.


  1. The other side of the picture is that of stagnant supply growth these past nearly 7 years, due to marked decline rates in existing conventional oil field production (crude oil plus condensates).

    Almost all the growth seen since then has been in unconventional plays such as heavy oil, shale oil, extra-deepwater and the like, all of which is very time-consuming and costly to develop. This marginal production requires prolonged elevated prices to make it worthwhile.

    The scenario of declining new projects and workovers of existing fields, in the wake of another severe global downturn, means that any potential rebound in the economy will be faced with a double whammy next time around. High prices and a lower supply ceiling, due to the declines in existing fields previously mentioned. This was not the situation in 2008.

  2. I suspect your conclusion about the double whammy of higher prices after the onset of a global downturn is correct. The timing is the key question. Iraq has massive reserves that are finally coming online and may rival Saudi Arabia's production in just a few years. This may temper the longer term picture for a while.
    Of course, we are counting on the Strait of Hormuz remaining open!!

  3. We’ve been bled, please stop the Fed

    Written in June 2009, things were clear back then

  4. PW, the case with peak oil is not so much the reserves, but production offsetting declines in existing fields. Comes a moment when we cannot keep up, despite what's under the ground/water, being turned into bio-fuels etc. and overall production starts its inexorable descent. There is a lot of decline to offset (5-7% p.a.) and even Iraq wildly optimistic claims will not be enough to counterbalance all of it, as it would take many many years to bring on-stream anyway.


Post a Comment