Is oil becoming the poor man’s gold? Oil prices are being dragged higher once again as gold continues its assault on all time highs. Oil of course does not seem to move on its own accord but gets driven higher by traders who can’t afford gold. I am only partly kidding. Gold is being driven higher for a lot of reasons. People are buying gold because they fear inflation. They are buying gold because they fear that mounting government debt will never be paid off. And gold of course is the currency of last resort if our entire economic system implodes in on itself, or so some people believe.
Some people have been buying oil futures for the same reasons. Unlike gold, oil has its safe haven buying limitations. Oh sure countries can use oil as a currency in a trading transaction, yet it is unlikely that you are going to take a barrel of oil down to the grocery store and exchange it for a loaf of bread. Well at least we hope that day never comes. The truth is that as the economy faces more inflation and or stress, we will see less demand for oil as price related demand destruction starts to set in. We have gone from peal oil back to peak demand only to hope for a day when we start worrying about peak oil again.
While oil is still locked in a trading range, gold soars higher because the market fears what an upside breakout at this point would do to the demand side for oil. As it is right now refiners, instead of racing to build supplies of heating oil ahead of winter, are instead trying to manage or reduce supply because demand is weak and the marketplace has an oversupply. Overall total oil demand is down 4.1% below a year ago so as much as oil might like to follow gold higher the hard facts of restrained demand is keeping this market relatively grounded. That is not to say that oil will not follow gold higher but it may take a major break down on the dollar or up on gold for oil to break out of the same trading range that we have been in for the last month.
Demand has been so poor that Valero closed its Delaware City refinery. The refinery made products from heavy crude, a process that isn’t exactly profitable in these types of demand conditions.
What may also keep oil grounded are this week’s oil inventories. After Ida we should see a large increase in supply. Look for oil supplies to increase by at least 3 million barrels. Look for gas to increase by 2 million barrels and distillates by 2 million barrels.
We should see good gasoline demand over this Thanksgiving holiday weekend. According to AAA 1.4% more Americans in 2009 plan to drive 50 miles or more for the holiday. More people are opting to drive instead of fly.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
