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Oil Recovery Will Be a While...

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October 22, 2008 – Comments (8)

Naked Capitalism mentions an oil stat that I think is extremely significant, along with some other significant facts.

First, demand fell from roughly 67 million barrels per day to 59 million barrels per day.  That's what, about a 12% reduction!  That is utterly enormous.  

He also contrasts the China demand increasing at 7.8% per year, and I might add that to make sound even better some of oil bulls have gone on about the population of China.  Well, China and India are using about 1/4 of what the US and Europe uses so a 2% drop there completely wipes out emerging economies increasing demand.

I didn't see, but also take into consideration that oil in China was highly subsidized, to the point that it was majorly stressing government and they saw what, a 20% price increase and that price is still highly subsidized.  

When you actually look at China's numbers the demand growth isn't even close to 7.8%, but more like 4.1%.  Right now they are building inventory, that means people aren't buying like they used to.

I think long term oil will be good, but I think there will be a few bad years before it turns around.

 

On a different topic, Bespoke has a chart of the 10 largest declines on the S&P.  

I found it interesting to look at the years that they occurred.  1973 is when the last top 10 declines happened, meaning quite a few of us haven't exactly been through a bear like this.

8 Comments – Post Your Own

#1) On October 22, 2008 at 10:19 PM, StatsGeek (29.37) wrote:

This may sound sort of Machiavellian, but I think the loss of revenue to the Middle East, Russian and others is just too great for them to sit idly by while the price of oil collapses.  The solution for them?  War, of course.  I have no idea what form it will take, but I believe there will be hostilities sometime in the next year that will drive oil back to well over $100.

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#2) On October 22, 2008 at 11:15 PM, socialconscious wrote:

Great stuff the oil stuff is spot on.Hopefully OPEC does not receive increased cooperation from Russia in output reductions. Russia needs high priced oil to even make a profit.Seconddly that  S&P chart gives us hope that this climate can only last  tops 3-9 months. 

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#3) On October 22, 2008 at 11:41 PM, dwot (45.58) wrote:

socialconscious, your comment made me look again...

There were 5 of those 3 to 9 month periods in the space of 3 years starting 1929...

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#4) On October 23, 2008 at 7:26 AM, kaskoosek (35.65) wrote:

A drop in oil prices would theoretically cause an increase in demand, so the the 12% reduction in demand is not static.

Supply is also elastic, since OPEC can choose to cut supply in order to maximize their profits.

 

 

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#5) On October 23, 2008 at 9:29 AM, dwot (45.58) wrote:

Theoretically kaskoosek, but you also have increasing unemployment happening.  You have already seen people take a shift in behaviour, picking more economical vehicles and those that can afford I would suspect are being more cautious in this economy.

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#6) On October 23, 2008 at 3:26 PM, wilder1ca (< 20) wrote:

The referenced "12% reduction" in world oil demand was not talking about current events.  It was referring to the "first oil shock"--actually the 1979-1982 period when demand did drop from 67 to 59 MMBD.  But there's a major difference: real oil prices actually doubled from 1978 to 1980...whereas now in 2008 oil pices are dropping dramatically.  With a global economic slowdown, we may see some slight reduction in world in oil demand, but without a dramatic price rise, don't expect to see anywhere near a repeat of a 12% demand drop.

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#7) On October 23, 2008 at 6:26 PM, PebbledShore (83.86) wrote:

The EIA in data published 10/7/2008 quoted September domestic consumption at 19.06 million barrels per day, and in their short-term forecast through 2009 they have consumption going up 1.18 mbpd by December of 2009 with each and every month after last month (September 2008) higher then 19.06.  In fact, going all the way back to January 2000 there were only three other months where consumption dipped to the levels reported last month.  In the EIA's long-term forecast they project 2008 average at 20.9 mbpd and 2009 at 20.71 mbpd with 2010 going right back to 20.99 mbpd.

I'm no expert, but I think the price of crude is going to remain volatile for some time and with it the related stocks.  I think the real question to be answered in trying to figure out the oil puzzle is to be found in trying to discern how capabale Russia, Saudi Arabia, Iraq, Iran, etc. are of increasing production to meet rising demand.  These are some of the most dangerous, unpredictable, and corrupt countries on this planet, and I think if they continue to prove that they won't or are unable to meet rising demand for whatever reasons, then the price of oil is going to skyrocket again.

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#8) On October 24, 2008 at 9:50 PM, jcrash (99.65) wrote:

People always think of oil with some type of parabolic price curve.  They also think of it with a nice steady demand curve.  Both couldn't be further from the truth.

 The demand destruction you've seen so far is only the tip of the iceberg.  What about all the people planning to buy a Hybrid NEXT time they buy  car?  What about all the suv factories only now being shut down?  What about all the stuff only now being planned?

The WHOLE move up was simply fast money.  Traders and speculators and dumb companies hedging when they should've been floating.  

When oil was at 138 I posted on SA that if the CEO's of the oil companies were smart they were hedging 100% of the production out as far as they could because parabolic curves are ALWAYS bubbles.  I don't think a single one did it.

 I expect oil to be under $50 pretty quick.  Gasoline at Walmart tonight was $2.19 a gallon.  Looks like sub $2 gas within the month.

In the end, this hurts and helps OPEC.  The high price hurts because it kills demand, but in the end, they need demand killed  - because once their oil is gone they are toast.  So, stretching out demand over a long as a period as is possible is their ultimate goal.  So, the demand destruction helps achieve this goal.

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