Looking For Clues (Oil Prices, Penance)

I haven't mentioned the collapsing oil price on DOTE, mainly because I don't know exactly why it's collapsing—the global crude oil demand data I want to see isn't there to be seen.

And since I've said in the past that oil would never be cheap again, and at current prices, crude oil is indeed cheap, I must do some penance. Mea culpa.

Hence this post. Also, I seem to be in a posting mood.

I've been looking for clues about oil prices. Here's one, from Platts.

Asia's top 4 oil users record slowest demand growth in 6 years

 

Singapore (Platts)--11Dec2014/221 am EST/721 GMT

 

Combined oil demand by Asia's four biggest consumers -- China, Japan, India and South Korea -- inched up a meager 0.4% in the first 10 months of 2014, on course to register the slowest pace of full-year annual growth since 2008, according to data analyzed by Platts.

 

Platts data shows China, Japan, India and South Korea consumed on average 18.16 million b/d of liquid fuels (excluding LPG) over January-October, a mere 80,000 b/d or 0.4% higher than the approximately 18.08 million b/d used in the corresponding period of 2013.

The four countries represent about a fifth of global oil demand, estimated to come in at 92.4 million b/d for 2014 by the International Energy Agency.

China and India for the past few years have been among the biggest contributors to incremental global consumption.

Barring any surprises in the final two months of the year, the demand growth in these four countries for 2014 would be even worse than the last anemic annual increase of 0.8% seen in 2008 -- a tumultuous year of historic high oil prices followed by the global financial crisis.

That's impressive—Asia's demand growth is going to be about 0.4% in 2014. The last time that happened was in 2008, when demand growth in the big Asian economies was 0.8%.

And I think you all remember what happened in 2008.

There are standard, unconvincing analyses (vox.com and The Economist) of the dramatic oil price decline, and then there are explanations which make sense (Alhambra). I'll quote from that one.

That leaves us basically once more in the hands of Occam’s Razor, namely that oil prices are falling hard because demand is falling hard.

The scale gives us insight into the nature of the slowing of the global economy, to which the U.S. is a full part, meaning that comparisons only with past and serious downslopes is not a welcome development; nor should it be “unexpected.”

Mainstream commentary seeks to reject this simple and basic argument because it cannot fathom, predicated on its penchant for nothing but parroting economic “authority”, that the world could fall so deeply into recession once more drowning not just in oil but also “stimulus.” Once you get past the idea that “stimulus” [works], logical sense is restored.

There is no way to demonstrate at this point that "weak economic activity" (as The Economist put it) is behind collapsing oil prices, but if I were a gambler, that's where I'd put my money.

And one more thing. The government told us that U.S. GDP grew 5% in the third quarter. And zerohedge told us that the reason behind the surge was a big health care insurance dump (from Obamacare) into the consumption data. And other sources I've seen confirm that.

We are further told all the time that the economies in the rest of the world (ROW) really suck, but the U.S. economy is doing great! Hmmm....

Total U.S. liquid fuels consumption rose by 470,000 bbl/d (2.5%) in 2013, the largest increase since 2004. Consumption of hydrocarbon gas liquids (HGL) registered the largest gain, increasing by 190,000 bbl/d (8.5%).

In 2014, total liquid fuels consumption is expected to remain unchanged, with declines in the consumption of HGL, residual fuel oil, and other oils offsetting increases in distillate fuel and jet fuel. Total consumption is forecast to grow by 140,000 bbl/d in 2015, with HGL and distillate consumption accounting for most of the growth...

You see, big surges in health care insurance spending do not increase "economic activity" (and therefore oil demand) in any significant way, but in fact constitute a large drain on the economy for those not working in health care. And I would add that the United States still has the worst health care system in the developed world. Certainly that is pertinent here.

On the other hand, we are told that falling gasoline prices (aka. a tax break) will stimulate demand. For what? Overpriced, inflating health care insurance?

I should have said crude oil will never be cheap again unless the global economy goes into the dumper.

OK, I feel better now.

 We should know what is really happening in a few months, certainly by the time 2015 is over.

Comments

[Oliver]

It's all very interesting - this relatively abrupt collapse in crude oil prices. My own variant of Occam’s Razor is based on my simple understanding of supply and demand. Namely that the demand for oil has decreased, probably owing to the weakening 'global economy', but the price effect of this has been dramatically magnified by the public refusal of OPEC - principally Saudi Arabia - to reduce production in response, coupled with deafening silence from the US regarding its shale oil production, which ought to be in severe existential crisis with prices going south of $50 a barrel.

Occam's Razor? The reason for the price collapse (as opposed to moderate correction) is the deliberate shunning of the law of supply and demand, played out in geopolitical cooperation between the US and Saudi Arabia aimed at weakening an emergent Russia.

Focusing on outcomes (re. previous post), if Russia and China work up the nerve to dump the petrodollar, the US economy has the furthest to fall.

And now I shall re-enter my cave of ignorance from which I briefly emerged.