Oil under $100 on demand destruction

So Many Stories So Little Time

Demand drops, bailouts, downgrades, refinery outages, cartels, surging inventories, rising rates, falling rates, rising dollar, falling dollar, war and turmoil. Not too much for oil traders to focus on. No, not at all. Yikes!

The oil market has the attention span of a two year old or perhaps an oil trader as the conflicting factors are driving the market back and forth between both the long and short side of the market. While oil has defiantly put in a top in the big picture and seems to be working lower, in the short term the market is get twisted around in a dizzying spin cycle that shows no sign of slowing down anytime soon. Oil has been moving lower overall on fear of demand destruction. Those fears came center stage with weak manufacturing data and deeply discouraging jobs data. Now with inflation still raining in China, rumors of more tightening are making the rounds. Weakness in China manufacturing data was a pre-cursor to weak US data and some fear that China might be headed for a hard landing. Obviously that would be devastating for energy demand. US demand is already weak.

Crude oil dropped below $100 a barrel ahead of US inventory data. A surprise 2.9 million barrel build in oil and a 2.6 million barrel build in gasoline sent demand destruction shivers across the universe. Distillate fuel inventories decreased by 1.0 million barrels last week and are in the upper limit of the average range for this time of year. Propane/propylene inventories increased by 1.2 million barrels last week and are below the lower limit of the average range. Total commercial petroleum inventories increased by 7.2 million barrels last week. The Energy Information Agency showed that total products supplied over the last four-week period averaged nearly 18.7 million barrels per day, down by 5.0 percent compared to the similar period last year. Over the last four weeks motor gasoline product supplies has averaged nearly 9.1 million barrels per day, down by 0.5 percent from the same period last year. Distillate fuel product supplied has averaged 3.8 million barrels per day over the last four weeks, down by 5.0 percent from the same period last year. Jet fuel product supplied is 2.6 percent lower over the last four weeks compared to the same four-week period last year.

Still David Bird of Dow Jones points out that gas demand might not been as bad as feared over the holiday weekend. David said that, "US gasoline supply rose 4.5% last week ahead of the Memorial Day weekend, EIA data show. Daily average supply hit a 9-month high and was up 2.8% from a year ago, reaching a 4-year high for the week. The figures run counter to data from MasterCard's SpendingPulse survey which shows gasoline sales fell 2.5% on year last week. EIA data measures movements of gasoline out of primary storage facilities, such as refineries, not actual sales."

Yet fears that Greece might not get another bailout caused even more bearishness in the market. The downgrade and political wrangling caused more bearishness in oil. The euro lost its mojo as traders contemplating the ugliness of trying to wash Greece out of the euro. Yet not only did the EU promise Greece another bailout, European Union and International Monetary Fund officials will come to the rescue and they are also floating the idea of creating a Finance Minister that could veto the budgets of member states. That way the EU could assure that a member state will not spend itself into oblivion! Maybe the US should join.

Perhaps then Moody's wouldn't be threatening to downgrade on US debt. Oil rallied back even more as the dollar sunk on fear that a US default would sink the dollar and drive up US borrowing costs. Oh what a tangled web. It seems Moody's is playing politics.

Even with the recent Libyan Oil Minister defection, the OPEC show must go on. With sectarian tensions growing behind the scenes and fears for the stability of their own governments this meeting will have meaning far beyond the numbers of barrels they say they are going to pump. We know that OPEC is already producing over quota so the big question is whether or not they will legitimize it by raising their quota.

Today's job report in the US may cement their final decision. If the jobs report sinks oil below $100 a barrel the greedy cartel will panic and keep the status quo.

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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