Saturday Oil Report -- May 21, 2011

The Nymex oil price has calmed down a bit in the last week, and now stands at $100.10/barrel.  Mysteriously, that's about 3 bucks higher than it was 2 weeks ago. After flirting with $4/gallon, the national average for regular unleaded is $3.867 according to AAA Fuel Gauge. I'm leaving the alarm level where it was.

Oil Alarm Level — Orange

Let's focus on demand prospects going forward. U.S. gasoline demand had been above the 2010 level, but high prices have disrupted the normal rise in May. Demand is now well below its 2010 level according to the EIA's most recent This Week In Petroleum report. U.S crude stocks are above their 5-year average as we move toward the Memorial Day weekend, which kicks off the summer "driving season." I expect this year's summer travel will be more subdued than in previous years.

What about global demand for oil? Many prognosticators are calling for a slowdown or crash in the world economy in the late summer/early fall. What might cause downward pressure on demand and price?

• We continue to get bad reports out of China. Many of us think their economy is now a house of cards, and are waiting for the crash. If it occurs this year, oil demand and price would plummet, and perhaps not recover for years to come. But who knows? The Chinese have been able to keep this 4 pins-in-the-air juggling act going longer than many of us expected.
• "The world is headed for an economic slowdown, according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth."
• Predictions of a 2008-like event in the fall of 2011 are now common. The supposed crash will follow the end of the Fed's QE2. I myself don't believe another crash is coming, as least this year, but who knows? There could be vulnerabilities in the world's financial markets I know nothing about. Nobody has been able to say exactly what these are, outside of asserting that the dollar will collapse, and there is no obvious trigger as there was in 2008 (the American housing market). But see China.
• It is hard to believe that the Eurozone's oil consumption (about 14-15 million barrels-per-day) has not been affected and will not be affected by the continuing debt crisis. Europe looks like another house of cards.
• Last but not least, continued high oil prices must surely be pushing down global oil demand. The IEA is now completely confused.

  The IEA, the energy monitoring and strategy arm of the developed economies, said higher oil prices were "affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates."

  The IEA governing board said: "As global demand for oil increases seasonally from May to August, there is a clear, urgent need for additional supplies ... to prevent a further tightening of the market."

  So which is it? How can high oil prices be affecting the recovery on the one hand, while demand is projected to increase on the other? I expect high oil prices to contribute to ECRI's "slowdown" in the latter part of the year, starting this summer.

Whether there is a global slowdown or recession, I believe oil prices have probably topped out in 2011, absent another supply shock. The Nymex price got up to $113, and I doubt we'll see that level again this year. What will the price be in 2 weeks? I think Nymex crude will be selling for about $97/barrel, but this forecast depends on a number of short-run factors (e.g. how the dollar fares) that are impossible to predict.

Comments

[BS]

Yes, the IEA call for more production is confusing. So is KSA decreasing supply right after Libya. So the supply side is confusing.

The demand side is more predictable. At $4/gal, there will be less demand. But gas has dropped $.40/gal here (Hawaii) in the last week.

Hurricane season is just around the corner. We have not seen much for awhile. The spooky oil markets would likely be spooked by a single cat 5 down through rig alley.

So bottom line, I am confused.