Sometimes good economic news sends oil higher and then sometimes it can send it lower too. Forget the Fed Minute talk that the economic rebound is not strong enough just yet to remove the QE 2 stimulus. The market may be doing that for them already. You see the selloff in commodities and the oil market was in part an acknowledgment that if the economy does indeed get better, the cost of commodities might have to adjust to a world that isn't going to be flooded with a lot of freshly printed bills. The price of oil has perhaps a $15 to $20 dollar stimulus premium built into a barrel that has to come out. That will have to be balanced with the upward price pressure from improving demand. This also means that those that made wildly bullish price projections for oil must indeed account for the removal of this market stimulus.
At the same, time investors in commodities that have racked up profits as they ran to the commodities markets to hide themselves from a turbulent and shaky financial world may try to take some of those handsome profits and diversify back into those markets like stocks and bonds that they tried so desperately to avoid. Because let's face it, it is highly unlikely that commodities are going to be impacted by the same type of bullish factors that drove them so much into the end of the year. In fact, even with all the bullish mania that has gripped the complex in recent weeks, the 2011 outlook, while still bullish, is obviously not as wildly bullish as recent market action might have you believe. Interest rates are not going lower and the next move by the Fed would be to scale back on stimulus if the economy continues to improve and building in those expectations will put significant downward pressure on oil prices.
We know that gasoline demand was not as bullish as last week's numbers would have you believe. The post holiday blues, record December gas prices and a massive snow storm in the North East sent gasoline demand tumbling to the worst level in over 5 years.
The MasterCard Spending Pulse report, as reported by Bloomberg News, showed that demand at the pump plunged 13 percent to the lowest level since Hurricane Katrina disrupted Gulf Coast supplies in September 2005. Motorists bought an average 8.41 million barrels a day in the week ended Dec. 31, down from 9.61 million the previous week. That drop in demand may also explain in part why the American Petroleum Institute reported a massive build in gasoline supply. The API reported that gasoline supply increased by a whopping 5.61 million barrels. Raising the question of just why are those retail prices so high? If we can avoid any refinery problems more than likely we have peaked on the retail side, maybe for the year.
Ok let's not get too excited because you know we always go crazy at the start of the summer driving season and that's when we usually peak, but if we get very lucky, it's possible that the price you pay in July might not be that much higher than what you are paying today. Yet despite the fact that the API reported a bounty of gasoline on the crude side we saw a massive drop.
The API reported that crude supply dropped by an incredible 7.51 million barrels. Now part of the reason that oil supplies are falling is because of the way the U.S. tax oil companies. Oil companies are forced to draw down supply at a critical demand period because if they don't, the government will tax them mightily. Isn't it time that we changed the way the government tax an already heavily taxed industry so we don't have these IRS inspired drawdowns in supply? More and more every December we have this pattern of rising crude prices and falling supply exasperated by our U.S. tax laws. This hurts the consumer and the marketplace. It has even played a part in driving oil prices to what the International Energy Agency calls a danger zone that could harm the global economic recovery.
They are calling on OPEC to increase production or producing nations and consuming nations will be at risk. In an interview with the Financial Times the IEA Chief Economist Faith Birol said, "it is not in the interest of anyone to see such high prices. He said that OECD countries account for about 65 percent of all global oil imports." Oil exporters need clients with healthy economies, but these high prices will sooner or later make the economies sick, which would mean the need for importing oil will be less.
In the very short term, therefore, "it may not be a bad idea that the producers are ready to increase production and show their understanding that these high prices are not good for the global economy," he added. Still the realities of a stronger economy could offset those worries. If rates rise and the dollar rebounds that should offset some upside pressure.
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 firstname.lastname@example.org.