Oil wants to drop and there’s no stopping it…for now
Just as oil shrugged off any piece of bearish news like a bullets bouncing off of Superman’s chest on its parabolic rise, yesterday it ignored a surprising piece of bullish news that came out. In this week’s oil inventory report, the Energy Department reported that the United States’ crude oil inventory fell by 8.8 million barrels when most analysts expected it to rise. To put this statistic into perspective, this is the largest drop in oil stocks since September 2004. So much for that demand destruction that we have been hearing so much about. Our oil inventory is now more than 20 million barrels below its historical average level.
The market’s muted reaction to this surprising piece of data, which normally would have caused prices to surge, leads me to believe that the bears have the con right now and that we probably are in the middle of a short-term correction in the price of oil. Where will we land? It is very difficult to say. I have been blogging that I would not be surprised if we saw oil pull back to the $115 to $120 area. The mumbo, jumbo, hocus, pocus chart analysts on TV have checked their candlesticks and ouija boards and say that $120 is a technically important support level. I suppose that sounds reasonable to me, but I don’t really care. The long term story and the reason why I have been purchasing E&P, driller, oil services, etc… stocks is very much in tact.
The amount of this finite resource that emerging markets use is rising dramatically. The percentage of people in the world who live on a dollar per day has fallen from 40% in 1981 to 18% in 2004 and it is estimated that it will fall to only 12% by the year 2015. During the period from 2000 through 2007, income per person around the world rose at 3.2%, the fastest rate ever recorded. Emerging markets now account for approximately 40% of the world’s economy when measured by purchasing power parity.
And these countries still have a lot of room to grow. China’s per capita GDP is currently only $2,500. It can easily double this figure to $5,000 in a few years. The same is true for India. So what you say, that’s still way less than the per capita GDP in the U.S. Well, try multiplying it by the 2.5 BILLION people who live in these two countries. That doesn’t even take into account the surging economies in countries like Brazil or the Middle East.
The bottom line is that everyone outside of the United States is earning much more than they have in the past and this trend is likely to continue. As these people earn more money, they will buy things that either consume or are made from of oil. All this is happening at the same time that the world’s major oil producing countries have underinvested in infrastructure and production from some of the largest oil fields is peaking. To me, all of this points to higher prices over the long-term, regardless of what short-term pull back we experience.