Oil on the eve of demand destruction

You don't believe we are on the eve of Demand Destruction.

Tell me over and over and over again my friend! You don't believe we are on the eve of demand destruction! The last time I honored the 1965 Barry Maguire classic "Eve of Destruction," oil was hurling towards $147 a barrel and I said that there is no way that this rapid rise would not cause demand destruction and damage to the economy. What followed was the biggest drop in demand in the history of the global oil markets. Now with concerns of another slowdown in the economy, is it possible that demand could crash again?

Ok it is not only the Fed worried about a slowdown in the economy, it seems that the International Energy Agency is as well. The Fed helped bailout oil bulls to a certain extent when they said they would reinvest principal payments on mortgage assets the central bank holds into U.S. treasuries in an effort to keep historically low borrowing rates historically low. I know it sounds ironic. The Fed is concerned that growth has slowed in recent months and fears that "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

Now while this may be supportive of oil from a weakened dollar standpoint, from a demand standpoint it is not very encouraging. The International Energy Agency, while modestly revising upward their forecast for world crude demand by 80,000 barrels a day this year, global oil demand could take a substantial hit in the months ahead should economic growth falter. Words like this coming from the International Energy Agency are really quite ominous considering the fact that this organization represents the interests of consuming nations and not producing nations. Usually the IEA would be warning producing nations to keep producing out of fear that if demand improves, we would not be able to keep up with it. In fact even as demand was tanking in 2008 the IEA warned that a lack of investment combined with a diminished incentive to ramp up output and cast serious doubt over how we would have been able to meet energy demand in the future.

Now the EIA seems less concerned with supply tightness and more concerned with the demand side of the equation. The EIA also slightly raised their outlook but one wonders whether they will have to change it if the economy does not respond to the latest Fed action. The EIA says that their view of the world oil market is largely unchanged from last month's report. They think world oil prices will rise slowly as world oil demand increases because of projected global economic growth, slower growth in non-OPEC oil supply, and continued production restraint by members of the Organization of the Petroleum Exporting Countries (OPEC). They are calling for a gradual reduction in global oil inventories.

As far as demand, the EIA says world oil will increase by 1.6 million barrels per day in 2010. They say that countries outside of the OECD, especially China, Saudi Arabia, and Brazil, represent most of the expected growth in world oil consumption. Among the OECD countries, only the United States is expected to show significant increases in oil consumption of about 0.15 million bbl/d in both 2010 and 2011. Projected global oil consumption grows by another 1.5 million barrel per day in 2011.

Tropical depression number five has formed in the Gulf of Mexico! The problem is that more people seemed depressed about the economy than caring about hurricanes. The market will take a wait and see approach as it is getting tired of over reacting to these storms! Oh yeah, there are two other tropical disturbances out there for those of you keeping count.

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
About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.

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