Oil's Big Blip On The Downslope

Just when things looked so bad for oil that its price was set on greasy skids, oiled by stubbornly slowing world demand, growing stocks, OPEC overproduction, increasing NOPEC output, large new finds of shale oil and stranded "greasy gas" able to yield NGL output, the mood changed and the bulls stormed back. US CFTC (the commodities trading watchdog agency) data will soon show how buyer intentions have firmed in the last two weeks, after a massive dip. They could also soon show how sellers are restoring their confidence, again.

Today's new mood of optimism, for the bulls, is driven by an outlook for US oil demand turning around, and above all by rising geopolitical tensions in the world: during the past week, daily price hikes hit as much as 3% for WTI and Brent, causing WTI futures to soar above $90 for the first time since May. US EIA (Energy Information Agency) data upped the USA's amount of total petroleum use, and bulls also drew succour simply because of the global economy's parlous outlook going forward, increasing hopes of more QE-style help for the economy in China, Europe and even the US.

In the week, Ben Bernanke's careful way of saying he is not ready to do QE3 or clone versions of it surely caused some initial disappointment for US oil bulls, but on mulling the way he said it oil turned around and rallied, as other harder-edged figures came in. The US housing market and a stronger number for industrial production were able to outweight the bad news from China and even worse economic news from Europe, but it was a terror act in Bulgaria against Israeli tourists, and a powerful upsurge in Syrian civil war fighting and terror bombing acts inside Syria against regime figureheads that really turned the market's new upward bias into a full scale breakout on the upside.

Syrian military figurehead slain included Asef Shawkat — the husband of the president’s sister, Bushra and deputy chief of staff of the military -- and others included Gen. Dawoud A. Rajha, the defense minister and the most prominent Christian in the government, and Sunnite military chief Major Gen. Hassan Turkmani, opening up speculation on what rebel factions operated the suicide bombing and how long the Bashr el Assad regime can hold, as well as what it will do with its stockpiles of chemical and other weapons. The answer from both Russia and China at the UN Security Council was 'niet' or 'bu' to any US and European military action against the regime.

GOLDMAN'S NICE PRICE WILL REMAIN ELUSIVE
Oil price euphoria even sent in a surge of natural gas futures buying, with Platts reporting that trading spiked on Wednesday, when the contract jumped to $3.02 per mln BTU, pricing US natural gas on an energy basis at $17.40 per barrel equivalent. As even this simple figure shows, the US natural gas supply revolution has changed the USA's energy picture forever - with a sure and certain downside for oil. The "nice price for 2012" that Goldman Sachs felt able to proclaim in a 'pro domo statement' on the base of reports from its algorithm-friendly analysts in September 2011, of $130 for Brent and WTI close behind at $125 a barrel, is an almost certain collateral victim.

Even in high gas price Asia, natural gas is backing out oil: Dow Jones reports that the Japanese government policy of promoting natural gas for electricity generation may further erode the outlook for Japanese oil demand continuing to be boosted by oil imports to compensate lost nuclear power output. The head of Japan's Petroleum Association, Yasushi Kimura, warned Thursday that government preference for natural gas sends a clear message for its oil industry - and for oil analysts expecting Japan's Fukushima filip to oil consumption, reaching as high as 400 000 barrels a day in midyear 2011, to remain sustainable. For the longer term, the government focuses renewable energy sources.

Dealing what is likely the biggest blow to Goldman's nice price for 2012, Dow Jones reports that China's commercial crude-oil stocks grew in June at their highest monthly rate this year, due to a significant decline in crude throughput at major refineries. Chinese buying of crude at lower prices from end April through June, and lowered demand growth result in this stocks growth, with a probable similar trend operating in India, where forward estimates of national demand growth are now as low as 3%, compared with a 1999-2009 year average 6%.

In both cases, China and India are showing us in real time how their economic policy of getting more GDP out of the barrel, and developing non-oil energy alternatives is radically changing oil analyst forecasts of as recent as 2011, which saw the Asian Locomotive driving global oil demand far above global supply, by as soon as 2015. Adding more meat to the new wisdom which is not Goldman friendly, China processed about 8.8 million barrels a day in June, for a decline of 0.6% from the same month in 2011, exactly dovetailing with official Chinese data released last week which showed national electric power consumption completely flat lining, at zero-percent growth on one year earlier. To be sure, oil bulls can point to shrinking Chinese stocks of refined products, but the upstream crude stockpile, and falling demand growth will surely limit Chinese buying needs going forward.

RETURN OF THE DOWNSLOPE
Other than Mid East mayhem, there is little rational hope for the oil bulls - and however long the mayhem lasts it will end one day, maybe soon. All major oil exporters, including Russia, need to export oil to purchase things as basic as their food and their Mercedes Benz saloons.

Apart from the energy supply side which is almost as bad as it's possible to imagine for expensive oil, the demand side is negative. Whatever type of QE emerges in the US and Europe, experience already tells us the easing is mainly for the "financial community", to deleverage some its accumulated debt, with the trickle down into the real economy being weak or hesitant. The potential for a serious hike in month-on-month GDP growth trends in the USA may exist, but in Europe this is an unreal prospect for several quarters ahead. The handy equation of Goldman's algorithms, that any recovery of GDP has to pump up oil demand, is about as realistic as imagining it will also quickly drive a recovery in jobs.

The big picture will be year-on-year global oil demand: for 2013 the forecasts are rolling in for zero growth YOY, but for this year 2012 we have a rising number of forecasts for a small but real decline in day-average oil demand for Dec 2012 against Jan 2012. This is an outlook which shrinks the rational oil price outlook to the $75 - $80 per barrel region, for WTI and Brent, with the decline of the famous Brent premium also operating on the downside - as well as in the fantasy picture which Goldman put together in Sept 2011 !