Weak Crude Oil Prices Mirror US’s Weak Economy

Weak Crude Oil Prices Mirror US’s Weak Economy

Weak Crude Oil Prices Mirror US’s Weak Economy


Late last month the US Energy Information Administration (EIA) reported that it was overstating domestic demand for Crude Oil and energy products to a “considerable degree”.

Using imprecise and lagging data, the calculations for the amount of product being exported overseas was understated by an average of 16%. Meaning that more output was being used elsewhere, so less product being used in the US. While that is a positive for US producers being able to ship wherever they can, it was a more grim reflection on the economy, especially this year.

As analyst Jeff Snider wrote recently: “In other words, there’s nothing terribly surprising in oil unless you are expecting dramatic improvement for the U.S. economy through something like a “full employment” liftoff. Instead, viewing oil as a primary intersection between finance and economy, the “rising dollar” part of the eurodollar decay unsurprisingly remains as an ongoing process – not a cycle to be moved into and then quickly out of. All the same mechanisms that were shocking economists in late 2014 and early 2015 are still visible here in the summer of 2016. It’s not going to just go away; like oil and gas inventory, it only gets worse a little more each time in these uneven waves.”

And now comes The International Energy Agency with more bad news Tuesday.

When Crude Oil prices 1st crashed starting in June 2014 the commentary was filled with the words “supply glut.” Particularly related to US fracking as the biggest contribution to non-OPEC growth, the intent in using those words almost exclusively was to downplay the possible negative implications of a serious commodity crash, and especially what was causing it, given that such crashes are monetary by nature.

So, for the most part Qil prices were purported to be the victim of too much success.

Fast forward to now, 1.5 yrs later, supply remains a problem, but focus has been forced to shifttoward demand. And it is here that the IEA’s latest forecasts have hit Crude Oil views hard.

Notably OECD Crude Oil inventories continue to climb, hitting a new record of 3.11-B bbs in July even though “refinery activities reached a Summer peak, Crude Oil inventories refused to decline.”

Now, we learn that refineries are starting to reject additional Crude Oil supplies, forcing the IEA to reduce its Y 2016 forecast for coming refinery runs to the “lowest rate in a decade.”

The biggest problem related to the “supply glut” is that nowhere are there signs of an economic recovery. Instead, demand continues to be off pace especially given where it “should” have been by this point.

From the IEA report: “The result has been a slump in oil demand growth from a robust 1.4 mb/d in the second quarter to a two-year low of 0.8mb/d in the third. Even with a modest weather-related uptick forecast for the end of the year, oil demand growth in 2016 will struggle to get above 1.3mb/d. Refiners are clearly losing their appetite for more crude oil. During the fourth quarter, they are expected to process only 0.1 mb/d more crude than a year ago.”

Our latest numbers provide some clues as to why. Recent pillars of demand growth China and India are wobbling. After more than a year with oil hovering around $50/bbl, the stimulus from cheaper fuel is fading. Economic worries in developing countries haven’t helped either. Unexpected gains in Europe have vanished, while momentum in the U.S. has slowed dramatically.”

So, now the IEA does not expect Crude Oil supply and demand to balance now until the end of next year, and that means Crude Oil inventory will continue to grow marking record highs along the way.

That being the case Crude Oil prices were down sharply Wednesday given these estimates and trends. October Crude Oil futures fell 1.34 (-3.0%) to 43.58 bbl.

Econ 101 teaches us that when the price of something falls significantly the demand for it should rise, ceteris paribus.

That is the problem with economics as there is no such thing as “all else equal.

In terms of Crude Oil prices, it is as if there is something holding back the world’s economy from taking advantage of these fundamental conditions as a truly strong or even just normal economy would.

The world’s Crude Oil output is going into storage because there is no economic growth, and there has not been for years. That is not recession, it is monetary.

Wednesday, the US major stock market indexes finished at: DJIA -32.29 at 18034.46, NAS Comp +18.52 at 5173.78, S&P 500 -1.19 at 2125.83

Volume: Trade was moderate with 878-M/shares exchanged on the NYSE

  • Russell 2000: +6.7% YTD
  • S&P 500: +4.0% YTD
  • DJIA: +3.5% YTD
  • NAS Comp: +3.3% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Neutral (-0.12) Bearish (-0.30) Bearish (-0.35) Bullish (0.29)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Neutral (-0.05) Neutral (-0.20) Neutral (-0.09) Neutral (0.14)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Neutral (-0.01) Neutral (-0.16) Neutral (-0.11) Bullish (0.25)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Neutral (-0.23) Bullish (0.25) Bearish (-0.28) Very Bearish (-0.67)
HeffX-LTN Analysis for USO: Overall Short Intermediate Long
Neutral (-0.15) Neutral (-0.24) Neutral (-0.17) Neutral (-0.04)

Stay tuned…

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