Wednesday, May 20, 2009 Oil Recovery Ignores Fundamentals

I think that has to be the 3rd-4th piece of the exact same concept I've posted the past 60 days but oil continues ever upward. As I've stated many times I am hoping we get oil back to $120 or so, or at least gasoline to $3+ so Americans can start asking questions about why this is happening... speaking Keynesian v Austrian economics simply goes over most heads. It has to be plainly obvious and hit them where it hurts before the "master plan" aka... "solutions to our problems" become obvious. Granted, China *IS* stockpiling every commodity under the sun [May 13, 2009: Commodities - It's China's World; The Rest of Us Just Live In It] but can 1 country really be causing all this? Yes - if that country is named the Federal Reserve.

  • Take a quick look at the oil price and you would think the market is rapidly returning to health. On Tuesday, the market’s main benchmark – West Texas Intermediate – jumped to a six-month high of $60.48 a barrel, up 85 per cent from February’s low of $32.7. Dig deeper into the world of physical oil and another picture emerges, however: the fundamentals of supply and demand are weak – much weaker than current prices imply.
  • Traders – some of the top executives at the world’s largest oil companies – say the recent rise in oil prices is due to investor flows and bets about long-term supply and demand, rather than any improvement in the near-term physical market.
  • It is difficult to reconcile the fundamentals with the surge in the prices,” a senior executive at a large trading house says, reflecting a widely shared view. “The move from $50 to $60 was not based on fundamentals,” adds another top executive at an important bank which trades physical oil. To be sure, traders are not forecasting a return of the lows of the year of $30 a barrel. But many reckon prices need to fall $10 in order to align with fundamentals.
  • Most analysts agree. Adam Sieminski, chief energy analyst at Deutsche Bank in Washington, says: “Oil prices have been supported by rising sentiment in the equity markets.”
  • With inventories already at record levels, the risk is that oil inventories [will] breach storage capacity and force spot prices lower,”he adds.
  • However, some analysts – and a few traders – disagree. They believe the surge does not represent any violation of fundamentals. On the contrary, Costanza Jacazio, an oil analyst at Barclays Capital in New York, reckons the rise is the result of “one of the most important” fundamentals, namely that prices at $40-$50 leave the market “dangerously far from equilibrium” in the long term.
  • What is more, a record amount of crude oil and oil products is floating at sea in tankers. Traders estimate about 100m barrels of crude and about 25-30m barrels of oil products – mostly distillates such as diesel and kerosene – are sitting in tankers waiting for a pick-up in demand. That would represent a 40 per cent increase upon floating storage levels in late March.
  • “Taking in account supply, demand and stocks, we should see oil at $40 rather than $60,” one senior oil trader estimates.
These are some amazing statistics about demand
  • Demand is contracting at its fastest pace since 1981. The International Energy Agency, the western countries’ oil watchdog, forecasts a fall in consumption of 2.6m barrels a day this year compared with 2008. Such a fall would wipe out five years of demand growth, pushing average oil consumption this year to 83.2m b/d, the lowest since 2004.
  • Traders say although demand appears to have hit a bottom – in part due to the seasonal pick-up in demand as the summer’s driving season arrives – there is little sign consumption will rise substantially in the near-term.
To finish let's say this is the "correct price" - even in a global recession. Just imagine how much fun we're going to have when something other than paper printing prosperity returns in a few years.

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