Sixty is not so nifty today as slowing demand fears now possess the energy complex. With politicians already talking about a second stimulus, the oil market reflects the darkening outlook for economic growth. Anemic retail sales and reports of lessening Asian demand played into the sobering mood. Oh sure, we did not close lower yesterday but the half hearted rebound after such a dramatic drop gave no one the impression that the bloodletting will soon come to an end. The market view has changed. Instead of worrying about inflation, it is now deflation fears that again have taken hold. It is not about the barrel being half full, it is about the barrel being half empty. With the market action mirroring last year’s top from all time highs, unless there is a major change in the economic outlook or some immediate stimulus, the bears will again rule.
That is not to say that oil won’t rise again. But it will take something special to change the trend. If it plays out like last year we could trend down into the end of this year and then turn next year when demand is expected to rise. A demand rebound is exactly what the International Energy Agency is looking for. The International Energy Agency said that they expect that global oil demand to increase by 1.4 million barrels a day, or 1.7%, to 85.2 million barrels a day next year.
Yet at the same time the International Energy Agency is warning that additions to global refining capacity in the coming years are likely to create a substantial overhang and could prompt some refineries to close.
Platts News quoted the head of the IEA markets division David Fyfe as saying that, "In view of a weak oil demand, weaker utilization rates would cause a real squeeze” on refineries in OECD countries. “We seem to be heading back into boom and bust in the refining sector." That’s right! Too many refineries! Instead of building more we may need less. We went from a world where spare global refining capacity was nil to a world where refineries could close due to a lack of business.
Of course we still have other concerns. The dollar was again blasted by the Chinese. The Financial Times reports that, "China has launched its highest-profile criticism of the dominant role of the U.S. dollar as a global reserve currency at the G-8." Dai Bingguo, Chinese state councilor, was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates among leading currencies.
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com .
