Oil Demand Collapse

The rise and fall of crude oil prices is nothing short of amazing. Keep in mind, just last year the market had never seen oil over $100. Here at our office we had a running contest on when crude would close above that big psychological barrier. On a side note, one floor trader bought the first contract at $100.00 immediately selling for a loss in January – just for bragging rights. But it wouldn’t remain in the $90’s for long. In mid-February, crude ‘broke the Franklin’. After that, there was no stopping it.

By mid-summer we were staring at $149 crude oil. Bullish observers said it was heading to $180, $200, even $400. Doom-n-gloomers spoke of sustained $5, $6, and $10 a gallon gasoline. It seemed, despite a global slowdown, the world was still clamoring for every last drop of Black Gold. Until something happened – collapse! Once economic realities caught up with the NYMEX energy pit, oil fell hard. Go here to check out the dramatic rise and fall of crude oil.

What Happened to Crude?

The story of energy prices is the story of the global economy. Once traders realized the U.S. economy still affected every other country, the slowdown commenced. Demand for energy fell at home and abroad. Internationally, less trade meant less revenue to fund construction projects in emerging markets. The once-darling BRIC (Brazil, Russia, India, China) countries experienced a sharp economic contraction. This happened just after OPEC moderately raised production. I bet they’re regretting that now.

Domestically, other things curbed global energy prices. Demand fell as drivers modified driving habits to reduce their need to buy gas. Consumers account for about 50% of domestic energy consumption. Businesses also lessened transportation expenses. On September 2, the iShares Dow Jones Transportation Average ETF (IYT) traded at $91. Although, it’s recovered slightly, it will close below $70 today, a -23.7% decline in 2 months.

Crude Oil Rebound In Sight?

If you’re like me, you’re not exactly mad paying $2 and change for gas again. I don’t know why, but I usually put the same dollar amount of gas at the convenient store. I’m loving how I can go a lot further with the same $40 in my tank. In other words, I’m not exactly cheering for a rebound. Right now it looks like there’s more room for downside.

On Friday, oil slipped below $65/barrel. Analysts cited a contracting U.S. economy evidenced by Thursday’s GDP numbers. What’s good for stocks is evidently bad for oil. If you’re trading futures or ETFs, I don’t like the long-oil chances yet. Sure, we’re off -56% from the high, but it can still fall further. The mid-September rally was short-lived causing even greater pain in October. This new rally could be another head fake. Wait for a sustained trend to develop, then consider a good entry.

Photo by species_snob