SWIMMING IN OIL?
Source of Picture: fashionfunky.com
The threat posed by Iran test-firing its Shahab-3 missiles and a rally in US equities on increased M& activity in the drug and technology industries pushed crude slightly higher yesterday after last week’s steep declines.
This is yet further evidence that the oil market is why out of sync with real demand for the black stuff and just about all its derivatives.
“July’s Vehicle Miles Travelled (VMT) figures were released last week, with total miles driven clocking in at 263.4 billion miles, up 2.3% from July 2008,” writes today’s Schork Report, the daily online data and analysis service for energy and shipping markets.
“That is a solid increase but keep in mind: Gasoline prices have decreased by 38% since last year.
“Further, July 2008’s VMT figure was 3.5% lower than July 2007. Therefore, this year’s ‘increase’ was 1.3% below 2007 and 0.5% below the 2003-07 time-step, thereby continuing a steady VMT decline.”
This is more evidence that we are miles away (excuse the pun) from the credit-fuelled demand levels of 2003-07 for everything from barrels of oil and gigajoules of natural gas to synthetic dog coats.
Chemicals demand in the UK might not return to pre-recession levels until as late as 2020, Oxford Economics has warned.
But don’t bet against speculators pushing crude prices back up again, especially if conflict breaks out with Iran over the missile testing and the alleged development of nuclear-weapons capability.
This is despite weak demand, as the Schork Report has pointed out, and deeply oversupplied crude and crude products markets.
Such is the oversupply that even a disruption in Iranian production (Iran is the world’s fourth-largest producer) might not make much of a difference, assuming that the conflict doesn’t spread to elsewhere in the Middle East.
“Saudi Arabia was running just about flat out in 2007. Now it has 6m barrels a day of spare capacity,” said an oil industry observer last week.
Recent falls in gasoline mean that its pricing could be close to “meltdown”, according to this report from Bloomberg.
And as my fellow blogger Paul Hodges pointed out last week, the historically high amount of oil in floating storage is now being delivered to refiners due to a narrowing of the contango.
So I am with those who believe we are heading for $45 a barrel before the end of this year.
Still, a two-way bet might be advisable – just in case there is another rally.