Friday, December 19, 2008

The End of the Oil Price Bull Run, Not




Light, sweet crude for January 2009 delivery reached a low of $33.87 on last Friday (19 Dec), the lowest since early 2004. The rapid fall in oil price in recent weeks was said to be due to reduced demand resulting from the weakening economy. Does this mean that we can return to our gas-guzzling way of life? as a person concerned about the environment, I sure do not want to see that happening. As an investor, I have more choices.

Data from the US Department of Energy site shows that, the retail price of gasoline in the US was falling in the last few months at a rapid rate. One press report suggested that the retail price had been falling for 86 days previously, but rose on Friday. The DOE data shows that actual gasoline supply has started going up since the week ending 28 November, although the increase was small.
The graph of motor gasoline supplied over the last 18 years is an interesting one. It shows that US actual demand for motor gasoline was rising since 1992, but peaked in late 2007. Since then, it has been in decline and also the range has narrowed. In other words, the demand was rising even when oil price was increasing rapidly from 2005 to 2006. We can speculate that the headwind caused by higher oil price on demand only reached its full strength in late 2007. Maybe because the world economy was growing robustly between 2005 and 2006 and that supported the rise in demand despite the higher oil price.
The scenario today is a weakening world economy and very low oil price. The demand for gasoline in the US dropped from a weekly volume of about 9.3 million barrels to just over 9 million barrels before 21 November, and has been climbing by a few thousand barrels per week.
Also, futures of the crude delivery in February has risen to $42.36, an increase of 69 cents since the day before.
Governments around the world are busy printing money and lowering interest rate. In about a year's time, asset prices may feel the effect. Let's hope for my portfolio and my environment that oil price will go back up to around $60 before the end of 2009.

btw, I heard that Snowballs has just got married. If so, congratulations!