Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Truth About Crude Oil

Commodities / Crude Oil Aug 18, 2011 - 07:54 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleDr. Kent Moors writes: Traditionally, demand levels would determine the overall condition of the oil market. Supply (and the investment required for that supply) would be based upon what demand told us.

Actually, oil never reflected the demand-supply relationship as well as other sectors of the market. Oil has an irritating habit of not reflecting what it should in the dynamics of market play. Until recently, petroleum economists would comment (or lament) about the demand inelasticity of oil. That means, due to the lack of available alternatives (especially in transportation), demand for oil products would not decline as the price rose.


Such a relationship has certainly been tested over the last several years. The New York market price for West Texas Intermediate benchmark crude (WTI) moved from a $147.27-per-barrel high in July of 2008 to below $33 by the end of that year, only to rise again to almost $114 by the end of April of this year. It's moved back down to the $85-$90 range since then.

We did witness some demand destruction in the summer of 2008, and then (to a much lesser extent) in the spring of this year, with the rise of prices at the pump to well over $4 a gallon.

Yet what must be remembered is the simple fact that developed countries no longer call the shots in oil demand.

This is now - officially - a global market.

On the production side, of course, it has been a global market for more than 50 years. The primary reserves are located in the Middle East, the former Soviet Union and offshore in places stretching from Vietnam and Australia to the Arctic basin. The supply side, therefore, has been global for some time.

But now the demand component also is global in scope. This changes everything, as you'll see. And there's even a way to track this new (and more accurate) demand for oil.

Three "Crude" Shifts
By fixating on U.S. demand, analysts exhibit an out-of-date tendency. The description of the American market as "having less than 5% of the world's population yet consuming 25% of the world's energy" no longer has the impact it once did.

Yes, the United States remains one of the two largest end users internationally (the other being China). But the spike in demand now is coming from developing parts of the world. As demand figures move laterally in North America and Western Europe, they are accelerating elsewhere.

Three elements are leading to this rise.

1.The industrial and production advances in China and India, along with the East Asian recovery and the more recent moves in Indonesia, have resulted in substantial increases in energy demand. That translates primarily into an increase in the need for oil.
2.Members of the Organization of Petroleum Exporting Countries (OPEC) and main non-OPEC producers like Russia have been withholding more of their crude from the global market to advance their own refining and petrochemical sector. The move is not simply to supply rising domestic demand, but also to provide a larger value-added oil product export stream to improve return.
3.Regions usually ignored by analysts are registering accelerating demand. One of the most pronounced is West Africa.
Nigeria is certainly a major international oil producer (and one of the last sources for prized light sweet crude, which requires less processing). However, the country has insufficient refinery capacity, resulting in most of the crude being exported.

On the other hand, Nigeria produces only about 15% of the electricity it needs daily. That means 85% of the power comes from private generators. Those generators run on diesel. And the vast majority of that diesel must be imported.

Similar trade cycles are emerging in other areas of Asia and Africa. They are likely to become more pronounced.

The combination of these three factors completely overwhelms any sluggishness in U.S. demand figures. This offset is continuing.

So what does this tell us about the overall picture?

Demand Is Hitting An All-Time Record
Global demand will come in this year at an average 88.2 million barrels per day, an all-time record. That level will extend to 89.4 million barrels per day by mid-2012.

Yet, the headlines today speak of OPEC decreasing demand forecasts. The OPEC projection had been at 88.7 million barrels for this year. That higher figure, however, had been more political than anything else. It was advanced before the last OPEC meeting, in which Saudi Arabia failed to entice a production increase.

That was followed by Riyadh unilaterally increasing production some 500,000 to 700,000 barrels per day (nicely matching the difference between the two estimates, by the way) along with the poorly-conceived International Energy Agency (IEA)/U.S. move to release 60 million barrels from strategic reserves (half of that U.S.).

The reserve release accounted for only 18 hours of international demand.

It was never a factor.

The important point to remember is this: The global demand rise between June and the end of the year is poised to absorb all of the additional Saudi volume... and would have swallowed up continued IEA monthly releases as well.

The demand picture has not changed. In fact, as the market has revealed a number of times before, any short-term reductions in the price will merely result in an additionalencouragement to demand.

The global picture is one of the primary reasons why Brent, the London benchmark used more often to determine prices in other regions, has a price more than $20-a-barrel higher than WTI traded in New York. That has been the case now for a year, despite WTI being a slightly better grade of oil than Brent.

The vast majority of oil traded on a daily basis globally is inferior in quality to both of these benchmarks. But Brent is employed more as the standard against which oil is bought and sold at discount.

You can track the price of Brent right here. There's an ETF that tracks it, too - the United States Brent Oil Fund (NYSE: BNO).

Keep an eye on it, because it will tell you what is really happening worldwide.

Source :http://moneymorning.com/2011/08/18/the-new-truth-about-oil/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in