It’s a little bit of a tug of war between falling demand from rich countries and rising demand from developing countries. However, the first is temporary, while the latter is structural. That can only mean one thing. Before long, oil will move up again..
From Goldman Sachs:
- The tug of war between fears and fundamentals continues Despite economic-related concerns, recent data releases confirm that oil fundamentals continue to be tight, underscoring that structural supply-side drivers and emerging markets demand continue to offset OECD demand weakness.
- Despite sentiment-driven pressure fundamentals remain tight Concerns over demand weakness continue to overshadow supportive fundamentals. We believe that although the bearish sentiment linked to deteriorating economic conditions may continue to put pressure on prices over the next few weeks, potentially exacerbated by negative gamma effects, mounting signs of strength in oil fundamentals provide support and suggest significant upside risk to prices in the autumn.
- Strong EM [emerging market] demand and constrained supply tighten fundamentals Recent data releases confirm that constrained supplies and supportive emerging markets demand continue to more than offset weak OECD demand. Declining supplies in mature producing regions and strong non-OECD demand more than countered the 1.1% price-induced decline in OECD demand in 2Q08, leaving total OECD inventories flat in 2Q08 against a seasonal 900 kb/d build, and below 10-year average levels for the end of July.
- The 9.5% annual increase in Chinese demand in July exemplifies that non-OECD countries continue to absorb oil supplies and keep fundamentals tight even in an increasing price environment. Further, this week’s US Department of Energy (DOE) statistics have confirmed a decline in refined product inventories prompted by refinery run cuts, against a backdrop of continued low crude inventories.
- recent correction, structural drivers remain intact A decline in long-dated oil prices has underpinned the recent sell-off, at the same time as time-spreads have strengthened reflecting supportive near-term fundamentals. We believe the decline in long-dated oil prices is largely a correction after a dramatic acceleration in May and June. However, the long-term drivers are intact and the structurally constrained supply environment will likely continue to drive long-dated prices higher. At the same time re-accelerating industry cost inflation is increasing the cost-based floor to prices, which we currently estimate at US$105/bbl.
Just to illustrate what happened in OECD countries (or at least some of them):
- Americans drove 53.2 billion fewer miles in 2008 than in the same period of 2007. Because of gas prices, they changed that fast. They’re ready for change they can drive in and they will be readier by 2010.