So Much for Gasoline Demand Destruction

According to this week’s latest MasterCard SpendingPulse data, U.S. retail gasoline demand is back to levels seen earlier this year. Lower prices have apparently driven up demand, as Economics 101 says it will, demand destruction and depression be damned.

So, why haven’t oil prices followed suit, especially given production cutbacks, current prices dropping below break-even for major suppliers, and so on?

Some will blame speculators, and they have a point. Certainly it shows why supply/demand is only part of the equation in this market, as is true in all markets, of course. But sentiment has become badly negative on oil, and many institutional players and hedge funds have exited the market, many of the former having only entered months ago.

Comments

[Alex Filonov:]

It's just one more proof that futures market is a market of futures, and it reflects supply/demand for futures, not for commodity itself. Of course, hedge funds, pension and endowment funds completely changed balance of oil future market in the beginning of this year. I can't say it's pure speculation. But if sovereign wealth funds from oil-producing countries with nationalized oil industry participated in this market, directly or indirectly, this would be wash sale. I don't know if such things can be prevented, but they can (and maybe did) create huge price swings. In the long term market returns to the balance, and I'm absolutely happy for every fund which lost billions on oil future market, either on long or short side. Future markets are for professionals.

2008 Dec 09 03:24 PM

[Jolly_Rancher:]

First, it doesn't take much demand destruction to have a very large impact on price which is determined at the margin. Second, we are benefitting from the big slide in world demand for energy. So you need to examine global demand for oil. As refiners' cost for oil falls, they lower gasoline prices due to competitive forces. You also might want to take a look at natural gas consumption. There's may be some predictive value there, as natural gas may lead the way. But natural gas prices continue to drop also.

2008 Dec 09 04:06 PM

[nmelendez:]

Truth be told, it's more about the dollar. To many dollars on the sideline bringing down the commodity prices. The dollar has started back down and will probably hit around 62 before the market crashes again. Money is starting to siphon back in bringing up commodities.

2008 Dec 09 07:41 PM

[yank:]

Alex's post sounds a lot like George Soros comment earllier this year that money managers investing in commodity futures is un-American. The absolute arrogance of these people. I am a money manager myself. As a "fiduciary" I have a responsibility to MAKE MONEY for my clients balancing risk and reward. If I can't earn a reasonable return from investments in Financials, and other "junk" asset classes, I am going to put my money where the potential returns are greater. If that happens to be commodity futures contracts or commodity stock producers, so be it. I do not blame pension funds or endowments who invested in commodities one bit for what they did. They were doing their job. How dare anyone tell them how to invest their funds. Sounds like another tilt towards socialism to me.

2008 Dec 10 08:55 AM