Forget all that talk of weak demand, the dynamics of the oil market are a bit more complex.
The world is coming to grips with the fact that most of the world will not be buying Iranian oil and how they react may be the determining factor in the availability of high quality light sweet crude. Also, the Energy Information Agency oil inventory report may have given oil bears a false sense of security.
With Nigerian labor unions threatening to shut down production, light sweet could be in tight supply. The tight supply of light sweet crude was one of the major factors that kept product prices higher. On top of that a surge of crude oil imports skewered the demand numbers on the downside. That is not to say that demand is not weak because it is, yet underneath the data, with the added dynamics of the geo-political and US economic outlook, it was not as bearish as it seems. One area that should raise red flags is the drop in stocks in Cushing, Oklahoma which hit the lowest level since November of 2009 as pointed out by Reuters News. Keep in mind that the bulk of the build had to do with the highest amount of imports since July of 2010 most of which came into Gulf Coast that was impacted by issues in the previous weeks as well as yearend tax shenanigans. I also agree with Goldman Sachs that says that the rising price of oil is more about Iran jitters and may have to do with an improving economic outlook.
Bloomberg News reported that, the bank sees little evidence of an Iran premium in crude and says increasing confidence that Europe's debt crisis will be contained in the region is helping to raise prices. The EIA reported that crude oil inventories increased by 5.0 million barrels. Total motor gasoline inventories increased by 3.6 million barrels last week and distillate fuel inventories increased by 4.0 million barrels last week and are in the middle of the average range for this time of year. Total commercial petroleum inventories increased by 9.4 million barrels last week.
Gas demand is the weakest since the early nineties but as I said before, don't look for gas demand to come back anytime soon. The gas market has gone through the most significant demand destruction since the 1970's. Don't look for that to bounce back anytime soon. In fact perhaps never! We have hit a long term peak in gasoline demand. Yes, demand has been hurt by record high prices in the short term and long term it only reinforces even more long term demand destruction.
Is it really a surprise that we are higher? You have to remember that we are trading a futures market not a present day market and data from the world's largest economy is expanding and there is a risk to supply. That is bullish not bearish despite what seems to me to be weak current demand.
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