Oil: Another Bubble Ready To Pop?

The demand is shrinking, but the price is rising anyway. This is the situation on the market for oil. But this could change soon.

At least in the U.S., the world´s largest consumer of energy, the demand for oil is falling. This week the U.S. government published that the total petroleum demand fell in the last week of December 2.6 percent to 18 million barrels a day (bloomberg).

We got more data from MasterCard,  which counts payments at gas stations made by credit cards and checks (bloomberg). They reported that last week the U.S. gasoline demand sank 14 percent from the prior week to the lowest level in more than seven years of records. Fuel use fell below a year earlier for the 18th consecutive time last week, slipping 3 percent from 2010 levels. Fuel demand over the previous four weeks was 3.4 percent below a year earlier, the 41st consecutive decline in that measure.  Gasoline consumption in 2011 fell 1.6 percent from 2010.

These data are more impressive if we compare them with the still climbing retail sales in the U.S. The U.S. consumers spend more money for goods & services, but they save on gasoline.

I reckon that oil demand in Europe, where retail is much weaker than in the U.S., is falling even faster. I couldn´t find statistics for that but other interesting numbers. Gasoline supplies in independent storage climbed to the highest level in almost six months in the European hub of Amsterdam-Rotterdam-Antwerp, reported Bloomberg (bloomberg). Stockpiles rose 14 percent to 706,000 metric tons in the week to last Friday.

All these statistics show that the users of oil react on the high oil price. The commodity costs now around $100, around 4 times the average price we had to pay in the 90s! Last year the U.S. gasoline price rose 6.5%. Companies & consumers are trying now to burn less energy. For instance modern cars need much less gasoline than old one. Home appliances like refrigerators, washing machines and dishwashers are a lot more energy-efficient and use less electricity. The high gas prices are also dampening the appetite to drive. Companies, which are more cost conscious than consumers, also are anxious to save as much energy they can. For instance airlines are replacing their old planes with modern jets which burn less fuel.

While the demand for oil is curbed by more efficiency, thanks to the technological progress, and a sluggish economy, the supply of oil is still sputtering. The OPEC nations are keeping their output level, because thy need the money to please their unruly population. Independent producers like the U.S. are pumping much more oil & gas, thanks to the technical progress, which helps to unlock the resources. Even Russia  stretched its oil production in the last year significantly.

The oil market ignores these developments for now. The market is obsessed with the Iran conflict. The price of oil doesn`t reflect real supply & demand. Instead it reacts on speculations that Teheran may endanger the supply of oil by military actions. But I believe that the Iranian government is just playing games and will avoid a real war against the U.S. and Europe. As soon as the market will become aware of that it should react to the real supply and demand situation which means  the oil bubble could pop.