85 comments on Tight storage may lead to huge oil price drop
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85 comments on Tight storage may lead to huge oil price drop
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These are nice charts. Although consumption of oil has fallen somewhat in the US, the largest use of oil is in making gasoline. Domestic consumtion of gas has fallen less than 1 percent in the first quarter of the year vs. year ago. The largest users of distilates, trucks, railroads and airlines have seen reductions in use of 6 to 12% from what I have read in the Journal of Commerce.
But with the stimulus program ready to kick in, hundreds of thousands of barrels of diesel will be used for construction equipment besides gas used by the 1 to 2 million workers used in these projects. The use of asphalt is likely to be substantially above last year's for the same reason. Gasoline consumption will likely be above last summer's level as more people take driving vacations instead of more expensive air travel. US DOE statistics show that driving uses as much fuel per passenger as flying.
The main question that has to be answered to predict a price move is:
Who is storing this oil?
If it is producers, then they will have incentive to sell at some point sooner than later. If is large users like China or India then maybe the oil in storage is just waiting to be consumed by their economies which are not contracting like US. If speculators are doing the storing then, who knows?
The diagram above shows development in US gasoline consumption (with a 52 WMA ; 52 Week Moving Average) to smoothen the swings in the weekly data. Plotted against the left y-axis this is not zero scaled. In the diagram is also plotted the average weekly gasoline price.)
The diagram illustrates that growth in gasoline consumption came to an end as the average annual gasoline price went above $2,60/gallon and declined as crude oil and gasoline prices continued to grow. As gasoline prices retreated to $2,00/gallon, decline in consumption decelerated and is now mostly believed driven by the economic slow down./i>
Distillate consumption is, in my opinion, a far better indicator of the fundamental strength of the economy than gasoline consumption.
Who is storing this oil?
That is a good question, and the answer to that could give a clue to what expectations these participants have.
From what I have read some of it is stored by oil companies (that also owns refineries) suggesting that they expect prices to grow in the future. However, these market participants have been wrong on previous occasions and could of course be again.
Does anyone here think that the oil companies are increasing inventories so as to generate a dramatic drop in prices -- and thereby crush investments in alternative energy and energy efficiency?
It seems to me that I've read this book before, back in the late 1980s and early 1990s.
Perhaps I am only being paranoid ...