What’s Really Driving The Price Of Oil?

August 09, 2010

Will oil maintain the status quo? Or will short-term supply and demand imbalances outweigh the impact of high stockpiles?

 

 

The Internet tends to be a Wild West of opinions on investing, but I think some of the best work actually documenting and comparing the various sources of information on energy and petroleum is over at The Oil Drum. Now, to be clear, they don't claim to be an unbiased news source; their bent is pretty firmly in the peak oil camp. But they regularly feature dissenting voices and academic debate, and consolidate raw data, regardless of whose point it makes.

One of the site's best regular features is the Oilwatch, a monthly consolidation of new oil statistics. Cruising through last week's issue, I was struck by this chart:

OECD Consumption

 

I had a hard time marrying that chart against the short-term news reported by Brad Zigler last week. In his piece on oil stock drawdowns, he correctly points out:

 

The U.S. Energy Department's weekly stocks report put the draw in domestic supplies at 2.8 million barrels vs. the Street consensus of a 1.4-million- to 1.7-million-barrel decline.

The industry-supported American Petroleum Institute estimated that crude oil inventories would decline by only 776,000 barrels.

 

If you're long oil, it's easy to see numbers like that and get excited. Usually, however, big drawdowns mean supply-demand imbalances, right? But unfortunately, energy markets are rarely that fickle, or that predictable.

The challenge is figuring out which of today's numbers matter for both the short and the long term. Personally, I think the long-term trends are more important, as I'm more of a long-term investor. The OECD demand chart tells me a story of a recovery barely getting by, and certainly in no danger of springing into action with millions of barrels of unexpected demand per day.

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