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The Eve of Demand Destruction

Wed, Jul 30 2008, 13:24 GMT
by Phil Flynn

Alaron

Tell me over and over again my friend; you don’t believe we are on the eve of demand destruction. Oil prices are beginning to collapse on its own weight.

Look around and you'll see there are signs of demand destruction everywhere. Yesterday it was the road less traveled. In fact, the roads were a lot less traveled. It is official. The number of miles driven in the US have fallen 3.7% from a year ago that was down 9.6 billion miles from a year ago. That comes out to be 40.5 billion miles less than during the November to May period a year ago. That is a record drop.

Stories like Air Trans selling off jets and reducing capacity are in the headlines. Airlines are cutting back flights or going out of business entirely. Stories like China utilities exporting oil. Stories like Dow Jones discussions on spot Mid East sour crude slowing as September loading cargoes continue to clear.

It is now obvious to everyone that the run up in the price of oil has damaged the demand side of the equation. Even OPEC’s president is talking about keeping oil production steady even as oil has fallen from an all-time high made July 11 of $147.80 to a low yesterday of $120.42. Normally after a drop like that OPEC would be screaming for a production cut. Yet Chakib Kelli the President of OPEC seemed to say that OPEC should continue to pump oil at the current rate despite this incredible drop. Why would he say that? It is obvious that he realizes that the recent spike in price has damaged OPEC’s longer term growth prospects. He is worried that the demand we have seen may not come back anytime soon and that if oil does not come down soon demand for OPEC oil might not be as bright as it was just a few weeks ago. Besides conservation the run up in price has inspired alternatives and if we keep trying we might find some that work. Chakib Khelil also said that if the dollar continues to strengthen and the political situation with Iran improves, then long term prices will be about 78 dollars a barrel. (Oh my gosh, I agree with the OPEC President. I think I need a vacation).

More on BP Russian roulette. First the good news. BP’s profit jumped 28% to $9.47 billion. Now the bad news. That profit was buffeted by the Russian venture TNK-BP. The venture that is under attack by the Russian shareholders in the venture and by the Russian government. The Financial Times reports that BP warned of the risks of doing business in Russia as it reported what might be the biggest quarterly profit $8.6 for a British company. Yet it faces a battle over TNK-BP, its venture with the Alfa-access-Renova group of Russian tycoons. BP’s CEO Tony Heyward said that BP would defend robustly its rights under the shareholder agreement setting up TNK-BP and threatened legal action. Mr. Heyward advised international companies looking to do business in Russia to tread with caution.

And BP has to act with caution. It was just last April when TNK-BP was bragging that the venture had repaced 179% of its production with new reserves. As of December 31, 2007 TNK-BP Proved Reserves. If BP gets locked out of that deal it would be almost impossible to replace that amount of oil easily.

Today it is all about inventory and demand! Oil is getting ready for a potential major breakdown. Are you ready! Well get ready. Call me at 800-935-6487 or email me at pflynn@alaron.com and open your account with me! And get ready for some fun by signing up for the Fox Business News Network!

We're short September crude from apprx 12570 lower stop to 12530!

Sell September heating oil at 36000 - stop 36300

We're short September RBOB from apprx 30900 - lower stop to 30800!

Sell August natural gas at 1050 - stop 1070.

Have a GREAT day!

Published on  Wed, Jul 30 2008, 13:25 GMT