Wall Street is up to its old tricks again.
One year later, one of the key excesses that led our consumer-based economy into an historic downturn is being abused in the exact same way that got us $147-a-barrel oil last summer. Worse, many in the media are again getting the facts wrong on oil prices and demand—as if the ~~explosion of 2005-2008 never happened—as one look at last week's oil report will verify.
Forget what Cambridge Energy Research Associates reported on Oct. 13. By its calculations oil demand actually peaked in 2005 among the industrialized members of the Organization for Economic Cooperation, while in the U.S. alone oil usage has dropped by 2 million barrels a day compared with 2005. But remember these facts: As of this writing, U.S. supplies of refined distillates, including diesel, heating oil, and aviation fuel, are at a 25-year high. We have 29.56 million more barrels of oil in our inventories than we had the same week a year ago, and refined gasoline on hand is up 16.37 million barrels for the same period. And this does not include the 125 million barrels of oil that the Secretary General of OPEC says are being held offshore in tankers.
Skewing in Public In fact, the market is skewed by the high inventories of refined products. Last week, the Energy Information Administration showed that refinery utilization rates fell by over 4%, to 80.9%, yet oil jumped $2 a barrel on the news that our gasoline inventories fell by 5.2 million barrels.
That was the dark side of the futures market making its move: Oil should have fallen just because, according to the American Petroleum Institute, refinery crude runs fell by 511,000 barrels per day (validating that 4% drop in utilization). In short, refineries determine oil demand, and in that week demand for more oil was off substantially—yet the market bid crude up.
It is true that this time of year usually sees some refinery maintenance. But, as Truman Arnold trader Tom Knight wrote, "Though [refiners] say this is planned maintenance, we hear it is primarily motivated by very poor refining margins [and] the collapse of the sweet/sour crude spreads." Referring to "ongoing problems at the Delaware City [Del.] refinery," Knight gets the sense that this may be "the precursor to a permanent closure of that refinery." Basically, of course, overall demand for finished oil products is so weak and inventories so high that the "crack spread," or refinery profit, is virtually nil.
IEA Gave Us the Facts—Late This inconvenient truth is merely another strong indication that the retail market demand for refined goods doesn't come anywhere near justifying the market price for crude. Therefore, oil is back to being severely overpriced. This assessment was validated on Oct. 7, when Forbes published these facts: Demand for diesel and heating oil has fallen by 9.5% in 2009; aviation fuel use is off by 3.3%; and the only positive sign was gasoline usage up by 6.2%. Of course, that's "up" compared to last year, when the price of gasoline soared past $4 a gallon during the peak driving season, severely depressing gasoline demand—but now we find problems with the 2008 reporting on energy.
We were given a clue in a report that the International Energy Agency issued on Sept. 10, 2008, a few months after our own record prices for fuel. In it a chart, headed "North American Oil Product Demand, Change 12-Month Moving Average," showed that gasoline demand in North America actually started falling in August 2007, fully four months before the now-official start date of the recession, while diesel demand started falling two months later.
Moreover, diesel demand turned decidedly negative in March 2008, as did gasoline demand that May. This means that all the time the energy reporting was claiming that gasoline and diesel prices were going though the roof for simple supply-and-demand reasons, real world demand was falling rapidly. The oil reality was exactly the opposite of what Wall Street and other investors were telling the media.
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