you_can_call_me_Al

$125 Oil Not Sustainable for the Time Being

While I have been a peak oil supporter for these last three years, I can't help thinking that the current mania has some marks of a bubble. Yes, certainly, oil is a necessary commodity that countries will pay almost anything for rather than do without, but consider that that is only true when demand exceeds supply. I believe that demand did, for a time, exceed supply, and a great deal of the current price run up was the result.

It goes without saying that when (not if) demand destruction takes place, the price fall will be equally dramatic. Intuitively, you might even think it will be MORE dramatic when you consider the high leverage ratios of the players in this market.

The U.S. currently drinks about 25% of the world's oil. Almost all of that is used for transportation in some form, and about half of it goes into our gas tanks (What's in a barrel of oil? ...easy google). Looking at the American driver's habits as recently as last year, how much of that is truly necessary? Put another way, can a significant chunk of that fat be carved away?

I would suggest that it not only COULD be carved away, but that it's being done even now. Data is showing that people are driving less. Fewer people are buying SUV's. More people are taking mass transit. Further, internationally countries are reducing citizen fuel subsidies. Finally, all of these things are happening at the same time. These adjustments will probably bring demand back under global production capacity, and the price of oil should make an imminent pullback (...within the next three months? ...tomorrow???). Again, given the leverage available in this market, the pullback will be painful.

The absolute denial of the current reduction in demand amazes me. All deference due to T. Pickens, his comment that demand is CURRENTLY exceeding supply is self-serving. The price spike happened no later than the instant demand exceeded supply, and probably before. The obvious implication is that any reduction whatsoever will bring us back in line, and the price will react accordingly. He is certainly not ignorant of current demand trends, but don't believe for a second he's going to advertise that fact to you.

Short term: sharp pullback. Long term: one or two years after the pullback demand increases again, but this time there won't be as much fat to trim and it will be a lot harder to bring back down.

Long term oil super bull here, but for God's sake don't buy today.