Market Report: When Will Real Oil Demand Growth Appear?

How do you know when the economic recovery really begins? It is when real oil demand growth appears? Not just artificial demand growth being propped up with smoke and mirrors but demand growth that comes with solid economic activity and global growth. Growth that hopefully will be ignited by the low prices that will come when we start to remove the life supports to the economic system and global currency exchange rates start to normalize. Oil demand growth will be the thermometer that will take the economy's temperature and tell us that we are indeed getting healthy.

Believe it or not these are some of the same sentiments that are being expressed by the International Energy Agency. Well at least partly. Today the advisor to 24 consuming nations said while increasing it oil consumption forecast globally by 1.5 million barrels per day to 86.3 million barrels that demand from major consumers may herald an economic recovery. Of course while I agree that things are getting better I still wonder whether this oil demand growth is solid enough to grow on its own. Can it continue to grow without the massive stimulus and will it continue when demand goes away.

The IEA says that oil demand will increase a little bit mainly due to demand growth in China. Yet at the same time the growth out of China is as mysterious as the country.

Dow Jones Newswires report that while the International Energy Agency raised its forecasts for China's oil consumption in 2009 and next year, it has yet to solve the mystery of why the country's gasoline demand is subdued when car sales are surging. The IEA says that "Chinese apparent demand data feature some odd trends. The most glaring is the seeming mismatch between subdued gasoline demand and surging car sales. It believes the mismatch is probably related mostly due to incomplete data, such as the lack of inventory figures and possibly missing or understated estimates from independent retailers. It also talked about other explanations circulating in the market, ranging from greater efficiency as consumers buy more small cars, to local governments and companies buying cars to support local manufacturers and then parking the vehicles in parking lots. It also talked about the behavior of Chinese motorists, such as a tendency to use vehicles less frequently than drivers elsewhere. "However, as compelling as these explanations may be, they remain largely anecdotal, while some appear to be contradictory," the IEA said. Even if there have been gains in efficiency, China's car fleet is growing at such a rate that it points toward much higher gasoline demand than currently inferred from official statistics. Sales of big, gas-guzzling imported cars have also increased strongly, the agency said. "In addition, the central government has frozen expenditures for new cars and has strongly encouraged local governments to follow suit, thus casting doubts on its supposed willingness to support the local industry at all costs," the IEA said. The agency said it was virtually impossible to assess behavioral explanations, so the mystery remains unsolved.

Well regardless of that mystery and increasing demand expectations a walk on the supply side of the IEA report reminds us and the marketplace that supply is more than ample. OPEC production is at the highest level is a year and rising. The IEA says that oil in floating storage is 18% to 98 million barrels. OECD stocks are above average at 59.4 days of forward demand cover. There is more than enough oil for anyone that wants it. Not to mention products as well. Of Sure demand is rising but not fast enough to help out refiners.

The IEA as reported by Dow Jones says that conditions in the refining sector continue to deteriorate as margins ebb lower. The IEA says that the Organization for Economic Co-operation and Development states were worst affected with refining margins in the fourth quarter of 2009 falling across the board in the region at a time when crude price rises outpaced that of product price gains. The growth of OECD oil product stockpiles to historical highs in the last quarter of the year and the expansion of crude runs in China also weighed on refining economics.

The IEA also says that Product stocks in the OECD Counties reached their highest level in several years in September in spite of OECD refiners reducing crude runs by 1.7 MB/D on average in the first three quarters of 2009 compared with the same period in 2008. Global crude runs in the fourth quarter of 2009 are expected to average 72.3 million barrels a day, 600,000 barrels lower than forecast in the agency's report last month, while global throughputs in the first quarter of 2010 are forecast to average 72.7 million barrels a day, an increase of 1 million barrels on year.

It looks like natural gas yesterday not only priced in the much larger than expected drawdown in supply but also next week's much larger drawdown. I mean if we withdrew 64 bcf last week you could just imagine what we will draw next week. Well I guess you do not have to imagine because the market did it for you not only rocketing on this week's number but pricing in a draw for next week as well. The 545 area we should start to run out of steam.

Oil is ranging. The Market held off its test of $70 level and should try to continue its run back up towards 7300 to 7370 area. Position traders should try a short in that area for the larger move for a longer term test of the 65 handle. Short term and day-traders should be long but protect profits as the market at some point should roll over and run out of steam.