Flimsy Rhetoric Steers The Oil Boomers' Titanic

Bloomberg summarised the recent state of play: Oil in New York is breaching long-term technical support at $89.83 a barrel, according to data compiled by Bloomberg. On the weekly chart, that’s the 50 percent Fibonacci retracement of the drop to $32.40 in December 2008 from an intraday record high of $147.27 in July that year. Losses tend to accelerate from that retracement level.

European debt-and-deficit news was predictably bad on Monday morning, with a twist in the supposed fear taking the shape of whether or not Spain will ask for a bailout, or will stand proud for a week or two longer, before asking. The nicely timed (for Obama) US jobs report, of a stunning drop in the unemployment rate to below 8%, was already old news.

Therefore oil prices retraced because they have no place else to go.

Fundamentals remain hostile to overpriced oil. The oil boomers, however, never give up trying and claim to find some solace even in figures showing that German exports came out better than expected, also showing that somebody is buying all those BMWs, Audis and Mercs which will have to pass by the filling station pretty soon. The deep analyst brigade also keeps drilling into Iranian source rocks, uncovering details on how Iranian president Ahmadinejad is tanking the Iranian economy by strangling Iranian oil exports, due to the whole wide world totally respecting the Iranian oil embargo. In fact Iran's economic problems are made worse by it having to sell all the oil it can at below market prices, but the deep drilling analysts were unable to get that pricing algorithm right - so they imagine Iran is producing and selling a lot less oil. At least it helps boost market sentiment for a day or two.

Even worse, for them, if those famous oil sanctions are starting to work this could accelerate the decline of the Iranian power system, making it less rational to mount an attack on Iran's nuclear plants and research centers spread all across the country. An undestroyed Iran is evidently likely to produce and export more oil than a "liberated" Iran.

SHORT FUZE ECONOMICS
Oil boomers, in the US, like to harp about rising gas prices - not meaning ultra cheap natural gas but gasoline selling at a countrywide average of about $3.83 a US gallon the past 15 days. European prices run at about $8.50 - $9 a US gallon. Refinery problems in California led to gas prices spiralling over $4.60 a gallon, and also led to Jerry Brown waiving the smog-trimming requirement for summer blends of gasoline. The Governor told regulators to immediately allow oil refineries to shift to winter-blend gasoline to bring pump prices under control by increasing supply. Supply-side answers exist, and these bring down gasoline prices. The same applies to worldwide crude supply.

Outside of California, simply due to more than sufficient upstream crude supplies and refining capacities for producing US motor fuel, demand of which has not even re-attained its 2007 peak of 5 years ago, gasoline prices are declining. Only California experienced a short price bulge.

Weekly changes in oil stocks, sometimes up and sometimes down, provide little or no solace for the oil boomers, and the general small rise in average stockpiles year-on-year is outright bad for them. The exact same trend, but writ a lot larger and clearer, applies to stocks of crude and finished products in almost all major markets outside the US.

US natural-gas prices could or might be tweaked to channel oil price sentiment to where the boomers want, the upside. Gas (of the methane type) has had something of a price surge in recent weeks, but this needs to be seen for what it means. At around $3.30 a million BTU, this prices gas energy at about $19.15 per barrel equivalent: expensive energy! Competition from coal can always back-out "high priced" gas for power production, and expectations for warm weather going into Fall can also brake the surge in natural gas prices - meaning that oil energy's rivals remain cheap or even ultra cheap. Put another way, oil energy remains totally overpriced.

THE BIGGER PICTURE
Economic growth in emerging and developing East Asia, excluding Japan and India, is now forecast at 7.2 percent for year 2012, down from 8.3 percent in 2011 and also down from the May 2012 year forecast of 7.6 percent, by the World Bank. The slowdown in China has been “significant,” the Washington-based institution said. Both Japan and India face similar but worse problems of slowdown, with an inevitable downward impact on their oil demand, and import demand going forward.

The US and China are the world’s two biggest importers and consumers of oil; adding Japan and India, the 4-country total accounts for around 42 percent of world total oil demand, according to Indexmundi and BP's Statistical Review of World Energy. If we also add the European Union's 16 percent of world total demand, this 58 percent-total slice of world oil needs is under almost no hypothesis set to expand in the next 6 months, minimum.

Taking the EU27 in particular, 2012 "celebrates" its sixth straight year of declining oil demand - not a decline in the growth rate of oil consumption, but a straight 6-year decline in demand. Period. The oil boomers can pass that off as "only due to recession", and solved in a jiffy by QE of the ECB sort, but the real world has changed.

For the real longview, for OECD-type economies, the Japanese oil picture is the worst-possible news for the oil boomers. Japan's domestic oil consumption has tracked, and then overtaken the change and decline of its economy. From around 5.1 million barrels a day in 1979, national demand fell to 4.9 Mbd in 1990, and is stuck at about 4.41 Mbd today, which includes the short-term boost given to demand through oil-fired generators to compensate its nuclear shutdown, before gas, coal and the renewables take that role. Unable to call this "short run recession impacts" on oil demand, the boomers have to tell us why the same or similar will not happen to Europe - or the US.