Weakening Global Demand Makes Me Bearish On Oil

Includes: CEO, CVX, DBO, PBR, XOM
by: Nicholas Pardini

Oil spiked on rumors that President Obama will enact anti-speculation measures, but the upside of oil seems limited. My outlook for oil is bearish for the rest of 2012 because of a lowered probability of a war with Iran, global economic slowdown, real decreased demand for gasoline versus 2011, and political pressure related to gas prices.

The first critical, but rarely mentioned, factor that will hurt the price of oil is lower demand for gasoline. On a year to year basis, gasoline usage by American consumers is down 13.2%. This is not only a one year fluke as both petroleum and gasoline demanded has plummeted from its 2007 highs to their consumption levels in 1996 and 2002 respectively. I expect this trend to continue as higher prices at the pump, high unemployment, demand for fuel efficient cars, increased urbanization to big cities where cars are less needed, and cheap natural gas will continue the decline of petroleum uses in the US.

The outlook for European oil demand is not much better. The Eurozone has fallen into recession and countries like Greece, Spain, Portugal, and Italy are near depressionary contraction levels. Oil consumption peaked in Europe in 1999 and due high gas taxation, the growth of public transportation, and slowing population growth (soon to be decline), do not bode well for future European oil demand. Another notable pressure to European oil demand is oil is near record prices in terms of euros and British pounds (the 2007 oil run was more about dollar weakness than oil strength).

January-March Gasoline Usage in US by Year:

However, can increased emerging market demand make up for the slack in US and European consumption? Consumers in emerging economies are certainly driving more, but with the current slowdowns economically occurring in China and India (along with the hyperinflationary collapse in Argentina), I do not expect demand to increase at a high enough rate to supplement decreased demand in the European and American shortfalls in consumption.

European Oil Demand Since 1995

Political factors also bode poorly for oil. The first hindrance to oil prices is the increased unlikelihood of QE3. With near record high gas prices and relatively high stock prices, the trade off of additional QE will hurt the re-election changes of incumbent politicians. Oil trades historically inversely to the US dollar, and a strengthening dollar will hurt oil prices.

The political pressure of high gas prices historically has caused oil prices to be manipulated near US presidential elections. As displayed in my previous article on the performance of oil going into a presidential election, it has been strongly negative. From intrayear peaks, oil has declined on an average of 16.28% up until the month of November. Whether it is a secret release of the strategic petroleum reserve, the oil industry not wanting to rankle voters, or politically driven speculation, oil prices clearly react negatively to political pressure.

Overall, I believe that reduced oil demand and election related political pressure will bring oil prices down into the end of 2012. Investors should short oil (DBO) and stay out of big energy names such as Chevron (CVX), Exxon Mobil (XOM), and more speculative emerging market oil companies such as Petrobras (PBR) and CNOOC (CEO). However, when oil prices bottom around Christmas time, it will be an excellent time to buy.

Disclosure: I am short DBO.