Crude Weakness Ahead? Part III

Crude Weakness Ahead Part I/ Part II

Can Demand Hold? In the previous articles of this series, I mentioned a bearish divergence forming in crude prices and a bullish divergence forming in the U.S. Dollar. These relationships, in conjunction with a fragile economy, have alluded to the reversal of crude prices.

Recent reports have indicated that crude oil demand could increase in the short term. Even though these reports may signify that there may be an increase in demand, it does not necessarily denote that demand will increase. Given the current market conditions, I believe that further appreciation of crude prices will directly impact the recovery of our global economy.

Wednesday morning at 10:30ET, the EIA will be publishing its weekly status report on crude inventories and production/import amounts. This report will be pivotal in helping align current supply levels with our demand. A recent Bloomberg news survey showed that OPEC may have decreased its oil output for last week.

Assuming that the survey is accurate and OPEC reduces their output, will the reduction in supply be enough to stabilize crude?

Unless OPEC reduces their output by a significantly large amount, and U.S. stockpiles decrease at an alarming rate, I do not believe it will be enough to help stabilize crude prices at these levels. Regardless of OPEC’s reduction in output, I believe that supply levels will exceed demand and move crude prices lower.

In the chart below, the EIA has shown that the current U.S. crude stockpiles are exceeding their average amounts. This is another indication supporting the theory that supply could be exceeding demand.

Given the current market conditions (no hurricanes, etc…); I believe crude prices could depreciate nearly 25% before stabilizing around $50-$55 by the end of 2009.

Trade smart and prosper

Disclosure: At the time of writing, author owns multiple USO Puts.

Comments

[Ferdinand E...:]

Good article that contains a valuable observation : higher oil prices will be bad news for a recovery. Please contact OPEC and tell them that it is in everybody's interest to give Mr Obama and his helpers a hand by reducing the oil price a mite. By everybody explain to those fine folks that they are included.

Sep 02 10:07 AM

[perceptions...:]

"Can Demand Hold?"

To put it Crudely, were Demand to hold short term, that would send Oil prices higher, as Production HAS PEAKED.

In fact, we may have already seen that over the last 6 months.

The problem is one of BALANCE, in that, we are now out of balance!

Whilst everything was in balance with Demand, Production, Consumption and Reserves, all heading North, all was well with the world.

But now, we have a tug of war, with Production and Reserves heading south, whilst Demand & Consumption, are still trying to go north.

There is only one possible winner in this struggle, with major Producing countries already indicating lower Production has commenced.

Should the Saudi's follow the others and announce their fields are set to follow with lower Production, then the warning bells will ring loud! Even without any official Saudi acknowledgement, the fall in their Production over recent years is very suggestive!

So, whilst Demand may have held so far, it may be looking for another leg down, shortly, as the Global economy relapses, following another leg down on global share markets, over the next couple of months.

In the final analysis, the real question is not whether Demand will hold, it is whether Supply (Production) will hold?

And, again there is only one possible answer there, NO!

However and strangely, falling Oil Production may well be followed by a falling Global economy, with a corresponding drop in Demand and the end result could be that the Oil Price does not escalate, as may be thought lkiely!

Sep 02 10:26 AM

[Old Trader:]

Last night, I heard an Aussie analyst on Bloomberg suggesting crude will trade in a $65-$75/bbl. channel, over the near-mid term. Based on prices over the last 6-8 weeks, it looks like he's correct. (Note: he says his firm's a buyer around $65).

Sep 02 11:07 AM

[Al Fin:]

It is not a novel idea that high costs delay recovery from a depression. And just wait until carbon cap and trade and big energy taxes start to kick in.

Unfortunately, the Obama energy policies all promote higher costs for fuels and energy. This approach contradicts the public proclamations that prosperity is coming any day now.

It amounts to political peak oil, courtesy of your own government.

Political peak oil. The only kind of peak oil you will ever see.

Sep 02 11:09 AM

[Joe H.:]

High oil prices will grease the skids for adouble dip!

Sep 02 12:18 PM