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U.S. Distillate Demand Falling off a Cliff
By Dian L. Chu, Economic Forecasts & Opinions
Crude Oil had a breakout this week as the risk trade was put on, it benefitted from the short the dollar, and go long commodities play. Plus equities have been testing the higher levels, and trying to establish a higher trading range.
The problem with market participants today is that they become too bearish when indications appear bad and too bullish when indications appear good. For example on July 5th you couldn`t give crude oil away for $71 a barrel, and one month later, you couldn`t get anybody to sell it for $82.70 a barrel either. And the odd paradox of oil trading is that this is exactly what you should have been doing as a market participant.
The issue with getting too bullish on crude oil right now is that there are weekly inventory reports that give great insight into the fundamentals of the commodity. Unlike other commodities such as wheat or copper whose precise inventory levels are often a mystery at best, the EIA does an excellent job of providing a detailed report each week that comes out on Wednesday. And the current fundamentals do not support a strong bullish case for crude; in fact, they are quite bearish for the near term. Enough so that crude oil most likely will not go above $84 a barrel on this breakout. And if it does, statistically speaking, the odds favor being on the other side of the trade, It only pays to buy at the top of the market if there's a runaway bull market, and the current dismal fundamentals of crude oil preclude such a scenario. Of course, we are also assuming no disruptive category 5 hurricanes wipe out the Gulf Oil infrastructure, or Israel doesn`t attack Iran in the middle of the night.
The distillate picture is the most problematic for bulls. The main driver of distillates demand, which tends to track economic output closely, is heavy use by industrial sector, which has been severely lacking in the second quarter, when it was expected to be much stronger. The U.S. actually had a year-on-year increase for distillate demand between 2009 and 2010 as high as 17.1% for the last week in May; but it has cratered to +2.2% year-on-year in two months time.
Some of this statistic could have been distorted due to calendar timing. But what is worth taking note of is the huge rate of decrease in distillate demand over the last two months; it is literally falling off a cliff. (Chart 1) Stockpiles of distillate fuel are now at the highest level since the week ended Oct. 16. 2009 (Chart 2) And this distillate inventory builds will be problematic for any bull run for the near term, regardless of what happens with the other commodities.
This slowdown is also captured in all the economic reports over the last two months, from housing and manufacturing, to employment and GDP. All these economic reports are missing expectations, and prior reports are being revised down. It appears the US economy really slowed down over the last two months in particular, and this is problematic for oil inventories as this is their bullish season. The bulk of the summer driving season is over, and now we have less demand and rising inventories occurring at the same time in this commodity.
So, what is the outlook for crude Oil? It will probably trade back down on the next major move as the product`s inventory levels weigh on crude oil prices to in a range from $83 on the high side to $73 on the low side for the next couple of months until the inventory levels are slowly worked off.
This analysis assumes the economy picks up steam, and this economic stall was a normal pause in the inventory restocking cycle. Also that Washington finally gets it going into the election cycle, and starts proposing more business friendly solutions to the worrisome employment picture like some sort of payroll tax incentive for major corporations to hire US workers. And that Europe, China, or the US staves off any further near-term debt catastrophes, property bubbles, and or geo-political maelstroms.
However, currently crude oil prices are on the high side, and could be heading lower as the fundamentals overtake the recent liquidity inflows that have occurred over the last month. The really hard part with the future analysis of crude oil is how long it will take for the US and the global economy to work its way through the myriad of current economic woes, and deflationary deleveraging process that we are in the midst of currently.
But when the US economy does finally get its act together, banks start lending again, the unemployment rate dips below 7%, and private sector demand replaces the governmental stimulus role in the economy, look out above for crude oil prices.
Dian L. Chu, Aug. 8, 2010
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Excellent article.
And for those who couldn't tell, I believe the author's last line was sarcasm - pointing out the sort of things that would reverse declines in petro consumption.
And the notion that China can somehow prop up petro demand, ex US consumption of their stuff, is laughable. Their "existence" didn't gobble up their current share beFore they become an export 'powerhouse'.
Conclusion; the inventory restocking cycle is over.
Mark Beck
"But when the US economy does finally get its act together, banks start lending again, the unemployment rate dips below 7%, and private sector demand replaces the governmental stimulus role in the economy, look out above for crude oil prices."
uh, hello? Do you read me? Over.
When the US employment rate dips below 7%.?...I guess she means when the BLS gets even better at fabricating numbers, counting jobs on the planet Krypton and banishing the unemployed to limbo status.
the long term fundamentals seem bullish, as the BRIC countries add SPR storage capacity,, who was that guy at Cambridge Energy who said in twenty years we will be using 50% more oil. Its the same play as gold, it won't lose value faster than the currency. The DBD meme is going to be one of those forgotten poltiical slogans, as the cost of replacing rigs rises faster than the commodity. Like gold mining it just costs too m uch, and is too difficult (so why dont we just count the stuff in the ground) Oh you need that oil, well that's another story.
amazing that the price of a commodity as important as oil is not subject to the market's supply and demand (given how INelastic it is), but on the whims of financial traders.
out to be outlawed.
No one cared when oil was at $20/bbl for decades, commodity traders merely add liquidity to the market. Meanwhile world oil extraction has been plateaued for about five years now. You'd think higher prices would encourage additional extraction and a increase in supply, lowering the price. But it's not always this easy. Many oil exporters subsidize domestic consumption, so really oil does not follow supply and demand.
The higher oil goes, the less incentive there is to re-invest in producing more of it, because domestic economies can afford greater imports with the oil they already produce.
If the USA wants to lower oil prices, they need to start growing their own energy production, or alternatively, increase efficiency. They cannot rely upon Canada/Saudi Arabia/Iran to do the investment for them.
Sadly enough the only government I trust less than the Chinese is currently living at the White House. How bad is it going to get when an economic advisor from UC Berkeley could be construed as a right wing nut job from within the Oval Office.
Confuse stockpiling and consumption. Those Chinese love to cook the numbers just as much as the Jokers at 1600 PA Ave.
Margins as they are, I would think plotting Chinese consumption would make far more sense?
the Chinese now pay more for oil than we do, although they should try paying for oil in UST, but that might explain it. After Katrina Bush II used the US SPR as a shell game, oil was loaned to enterprise, after the hurricane, and paid back on paper only, therefore it sat in their POE storage tanks, and they counted it as their inventory, inventories were high, but the crack spread kept going up, and pretty soon traders began ignoring inventory reports altogether. Then some hedge funds got into the oil business, buy and hold mostly, they took oil off the market, perfectly legal but damned unAmerican. Thats when POTUS got into the exchange manipulation business. And we'll always have GITMO, same energy shell game. And they do the same thing with food, but ask yourself, who are they hurting, the big bad vendors who want to make an obscene profit selling a loaf of bread for $5 , or a gallon of gas, ditto?? So no one complains about market manipulation, because its your rice bowl. We're willing to do anything to eat and drive, if that means sending Iran back to the stone age, to paraphrase dick cheney. Nothing new here, keep moving forward people...
I am thankful the Iranians appear to be militarily ignorant! If they had any brains at all they would have pre-emtivly launched missile attacks on the K.S.A. oil terminals, pumping stations, refineries, pipelines, etc. That would insure they would never be attacked.
It's called chess and that is an optional move. Why should the Iranians make the move now? The world is watching the US economy and leaders (makes me gag to call them leaders) reserving judgement and actions for later in the game.
I would think otherwise.
Methinks there is a memo somewhere on an Iranian desk pointing out the consequences of any such action.
Just like gold, oil will keep on going higher. The oil price isn't only priced for the american markets. Asian market demand is growing big, European demand is also picking up...
So if American demand is stagnant, prices will keep going up.
And also the fact that there wasn't any investment made in oil refinery in the last 3 year spells also disaster comming.
SD,
3yrs?....Oil refineries......I guess your speaking off CONUS.
We have not been allowed to build a new refinery HERE in 3 decades.
Right, while emerging mkts have been building the expensive and complex refineries to crack heavy crude we have been sitting on our hands.
More short sighted non-decision makers in charge. Those clowns couldn't run a U Serve gas station and they are in charge of the country?
"...there wasn't any investment made in oil refinery in the last 3 year..."
The last significant new US capacity refining operation was built some 30, not 3 years ago. Since then there have been upgrades and additions to capacity, but no single new operation begun.
NIMBY, impact statements, whatever.
@sudden debt
Europe solved its debt crisis in 2010 like the U.S. "solved" its subprime crisis in 2008. Nothing was fixed by the shenanigans of the ECB and when this blows up in your faces, China will be left holding the bag. The Chinese "miracle" is hollow without ready and willing consumers in the western countries.
The dollar is oversold and is going to turn up before QE2. I wouldn't go long on oil until Sept. October when the Keynesians admit failure and go at it again.
Unfortunately for them, 5 trillion is a drop in the bucket compared to the dismal loss of asset and credit value. If I give the banks a trillion- will they lend it out and lose it? No, they are just going to play the better returns at the casinos or park it. In 5 year treasuries.
As the economy craters, look for oil to get stuck or fall. The average Joe does not stockpile oil and supply will rise
No need to buy petrol when you don't have a job to commute to and fro. So why aren't petrol and oil prices falling then?
Again, I don't think you understand, this is not 1960's! We no longer drive the price in the same way, with China and India making consuption record highs almost everyday! Static thinking leaves you lost confusing history with current and future numbers. My Grandmother still thinks a nickel tip is a very fair tip ha!
Oh yeah! Everything is just peaches and cream in China and India. China's biggest problem isn't inflation going forward.
Perhaps YOU don't understand. China's biggest problem this decade is civil war. Civil war is already here in the US. Just ask any small business.
Anyone. Feel free to knock off Andy Stern.
China's problem is keeping inflation under 10%..................and stopping their people from drowning.
If they spent some of their King Dong wealth on their infrastructure, and damns,public works, instead of millions of empty assed Condo's and Townhomes, it would go a long way to stopping Civil Wars.
As far as Dickhead Stern goes, he's already done his damage,made his deals, along with Soro's ass, and wrote the crap the Dems signed off on.
That is OUR Civil War, no one with Capital all 2 Trillion of it, is hiring, building dick here..so, their sending it overseas.
The MSM idiots do not get it.............Corporate profits are off the map, because their making it offshore......damned sure isn't from American Mfg,or job creation here............Bama's NEW DEAL's cost's too much.
It's Main Street USA your maggots.That's where the Economy for Joe 6 Pak is...............
Guy in this weekends Barrons wants a 2 trillion dollar QE 2. I almost threw up reading the article.
Fisher said NO Monetizing Deficits back in April.
(sarcasm on)
What part of no monetizing deficits don't these people understand?
A reprsentative from the Fed wouldn't lie.
http://www.reuters.com/article/idUSTRE63D4NC20100415
(sarcasm off)
China/India consumption isn't about their growth as much as it is about their existence with 1.3 billion people each! With overall production declines of 8% y/y I think that sums it up!
DAMN! I thought when the title mentioned distilates, we were gonna be talking Jim Beam and Jack Daniels. Now those are some distilates!
Jim, Jack, Johnny, General Ulysses and Jose if you are going to ecumenical and diverse about distillates. me, I'm partial to Dewar's....
Jose
Thanks
Cheers
Yeah, that's what I thought too!
What a disappointment. False advertising!
What was needed was more discussion on the moves in the oil price relative specifically to dollar weakness because that is where the trade will be occurring over the next six months.
Bravo! This lack of understanding the dollar collapse has moved all commodities traded in dollars seems very odd. Could this just be another ploy of media? This planned failure of the dollar to try and ignite inflation is so transparent it seems foolish anyone would follow, especially the Chinese!
I think the play is that as the dollar weakens the price of oil will increase to reflect the fact that oil deliveries are settled in dollars. That ought to be inflationary and make the Berbungler happy. But I do not understand how the supply/demand dynamics play into the dollar depreciation effects on the overall spot or contango price.
furthermore, money supply is growing only by 4% and
if they really want to move something they should be
more aggressive and have it grow by 6%. By the way,
in case you haven't noticed the reserves have been
declining since the last month and that mean that this
dollar 'failure' is temporary. It usually takes 2 - 3 months
for the markets to realize a change in the reserves.
Oil should be heading lower on economic fundamentals and higher on more Uncle Ben money printing.
Place your bets.
Bingo! Give Taraxias a ciiigar!
My favorite commodity play. Only thing to keep an eye on is a dust up in the Persian Gulf...even Israel doesn't really wanna go there...though they talk a lot.
Another goof that thinks anything in Cushing matters anymore. We are no longer the dog in production or consumption!
Contango bitchez.
i want what she's smokin.
Me too.........
"But when the US economy does finally get its act together, banks start lending again, the unemployment rate dips below 7%, and private sector demand replaces the governmental stimulus role in the economy, look out above for crude oil prices.
Gotta be on Crack.............