Oil Demand Continues to Slide

Oil inventories released yesterday morning continued to show a lack of demand for relatively low priced oil. The latest build of approximately 370 million barrels is the largest we have seen since 1990. This latest rally does not seemed to be confirmed by a change in the demand for raw goods. The chart below shows the advances and declines of crude oil inventories over the past 20 years. You will see during periods of strong demand such as 2001 - 2004 oil inventories declined, whereas during periods of slowing demand and increased supply, inventories declined.

It is possible that we have not yet seen the worst of this current recessionary period. One would think that an increase in the demand for raw goods such as oil, metals, timber and other commodities would signal a sustainable rally for equities. In the past few weeks however, the exact opposite has been happening. In the chart below you will see an overlay of the price of the Dow Jones AIG Commodity Index (White Line) and the S&P 500 (Orange Line). You will notice that over the past 6 weeks the S&P 500 has risen dramatically while the DJ AIG Commodity Index has stayed relatively flat to negative.

Comments

[Pearsonpc]

Good Article.

2009 Apr 23 09:10 AM

[The Greatest Rip Off of our...]

And yet gas is still on the rise, just another case of killing the goose that was laying the golden egg. Sometimes you can push the envelope just a little too far.

2009 Apr 23 09:53 AM

[Ferdinand E. Banks]

That's funny, in my energy economics textbook and a dozen or so articles I have discussed the relation between inventories and oil prices. Several of those articles may have been published in this forum, where there were some complaints about them being too long. .

In any event, the price in those articles was the short-run price. The interesting thing now however is the TREND price. That has to do with supply and demand. Left to consumers in a textbook market, that trend would probably be down, but thanks to OPEC it may not move down, but could be stable or - in theory - it might even increase.

I hope however that it doesn't increase. Need I say why? What about inventories? Solve the second order differential equaltion that I usually use to discuss this matter, and you will see that large inventories moderate fluctuations in price.

2009 Apr 23 01:37 PM