The En-Pro Blog

Gasoline and distillate inventories rose by 2.3 and 2.9 million barrels over last week while crude inventories fell by 3.7 million barrels, but inventories at Cushing, Oklahoma rose by 400,000 barrels.

As it has been for quite some time, the supply and demand scenario is pretty much the same old story. As a matter of fact, much of the “new” news in energy is the same every week; the manufacturing industry across the world is improving, although overall inventory levels remain high and demand levels remain low, job loss rates are improving, resale housing sales are increasing, etc.

To add fuel to the fire, the following chart illustrates the demand levels of gasoline in the U.S. over the last three years. (To subscribe to the Weekly Energy Report, send your email to info@en-pro.com) You’ll see that from 2006 to 2008 demand steadily increased until July and then sharply declined once we hit September. This is the typical scenario, but this year has not followed suit, demand has actually moved in the opposite direction.

When the economy recovers, the expectation is for a sudden jolt in prices. Although that may be the case, demand levels could have a slower than expected growth due to the higher fuel efficiency of domestic and foreign vehicles.

With the above evidence of reduced demand, and the influence of gasoline prices on crude prices, one would expect the price of crude to be relatively soft. As we have stated on numerous occasions, crude oil is highly over-priced and speculation is to blame. As we know, there has been an increase by investment funds in purchasing crude.

The issue we would like to address is the fact that these funds invest with a long-term goal in mind where funds are constantly buying contracts regardless of market fundamentals, such as supply and demand. These investors increased their holdings to an equivalent of 600 million barrels in June, which is up by 30% since the beginning of the year, where over the same period crude prices have jumped by 60%. It is obvious that speculators have had an impact on the market, but stand a good chance of getting their hands caught in the cookie jar.

By: Roger McKnight, Senior Petroleum Advisor