NYMEX crude oil futures plummeted today as gasoline inventories were discovered to be much larger than expected AND demand continues to erode, along with the U.S. economy.
But, there is light on the horizon. Much of the blame for the worsening economy can be laid on the price of crude oil. With that price coming down, the economy will react and get stronger. The nice thing that history teaches us is that oil prices don’t recover near as consistently as the resilient U.S. economy.
Today, September light, sweet crude futures settled down $3.98 (3.1%, lower) at $124.44, the lowest settlement price since June 4.
Crude oil futures continue to falter, posting a second consecutive day of losses in the wake of an 11% crude oil price drop last week. The front month futures contract is now $20.74, off its Nymex record close of $145.18 reached on July 3.
The U.S. EIA reported Wednesday that gasoline stocks posted a 2.8 million barrel increase in the week of July 18, far exceeding the 200k barrel increase forecast by many analysts.
Many traders saw this as a sign of eroding U.S. demand in the face of scalding energy prices. As The Price of Crude Oil has been predicting for some time, exuberantly optimistic oil speculators have created a bubble that cannot be sustained. This bubble was recognized by OPEC (who has been burned before) who refused to increase demand in the obvious face of such a temporary increase in prices.
A LaSalle Futures trader stated “For years people have never considered giving up their cars for their daily commute and we really are at that point,” and “People are actually making an effort to consume less energy to make it easier on their pocket books.” History teaches us that when consumers increase efficiency and conservation, demand never recovers - people don’t rush up to the attic to pull insulation out of the attic.
However, larger than expected increases in product inventories were tempered by a larger than expected draw from crude stocks. Oil inventories fell by 1.6 million barrels, compared with an average analyst forecast of a 400,000 barrel draw.
The product and the crude numbers offset each other in the eyes of most of the market place, according to Peter Donovan, VP at Vantage Trading. So what we have is long term demand decreasing with short term supplies also decreasing. The Oil Tycoon speculates that this will lead to much lower prices in the next few months.
Over the last six weeks, the increase in crude oil prices was supercharged by production interruptions in Nigeria and obvious diplomatic problems between Iran and Israel. With these concerns fading, traders have been discounting the “fear premium,” and begun to consider whether the latest leg of the upswing was overblown.
“We had a very explosive run up to the upside without really having true fundamental reasons,” said Peter Van Cleve, president at T.W. Energy Consulting.
Can anyone say “DUH!”?