Is The Oil Bubble Bursting?

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 |  Includes: OIL
by: Robert Loftus

For some time now oil futures have been in what I refer to as an "Inverse Demand Bubble", which is when prices for a given commodity remain constant in spite of declining demand. According to figures in the last EIA report (.pdf), it appears that US consumers have cut back significantly on oil and gasoline consumption. Gasoline consumption in the reporting period ending 12/2/2011 was -3.8% YOY decline, alongside a 1.9% decline for petroleum products overall.

Oil companies have responded by increasing sales of refined oil products to other nations - resulting in a drawdown on petrol stocks which has emboldened those traders who look at headlines without bothering to dig into the EIA report. The 12/2/2011 report included one very interesting detail: Petroleum exports for the week ending 11/25/2011 were at 634 thousand barrels per day. Petroleum exports for the week ending 12/2/2011 were 505 thousand barrels per day.

Given what we've seen of how Big Oil companies choose to manage themselves, it would be foolish to assume that the decline in exports of refined petroleum products is out of some greater concern for the state of the US economy. The more realistic scenario is that given the slowdown in the European and Chinese economies, and the fact that as other forms of trade are still relatively slow - other nations' firms are engaged in aggressive marketing of refined fuel products - sales staffs that are handling the marketing of US refined oil products may be having difficulty negotiating and closing sales.

Increased competition in world markets to sell refined petroleum products forces a redrawing of cost-benefit curves, and the increased US revenues from higher crude prices in the US - as an externality of drawn down inventories and emboldened commodities traders - may not be enough to off-set operational losses from competing with developing world refiners who are more than willing to engage in price competition. This puts oil refiners in a politically difficult position - even the most ardent conservative in the US would have a hard time swallowing the argument: "If US workers would just accept lower wages and benefits then it would be easier for the oil companies to gouge us harder on oil prices".

Also, the recent decline in oil prices which occurred as a result of ECB President Mario Draghi's announcement that the ECB and EU nations will not be engaging in a more aggressive bond buying campaign to assist European debtor nations is a double edged sword for oil companies that wish to draw down US reserves with export sales. With the euro weaker against the dollar, and with Europe being the most likely buyer for US refined petroleum products, the potential for limited sales growth to EU nations becomes very real.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.