A Blip in Demand for Gas

By Duru

August 22, 2005


Last week, the latest monthly statistical report from the American Petroleum Institute was blamed for a sharp correction in oil prices.  The July report indicated an unusually large drop in domestic petroleum deliveries of 3%.  Apparently, we have not seen a year-to-year drop like this since early in 2002.  This news served as a pretty good excuse for traders and speculators to lock in profits from oil and gas-related stocks and perhaps to run for the hills.  Coincidentally, Wal-Mart reported earnings the day before and warned that "…our customer continues to be impacted by higher gas prices…"  What a quick one-two punch to the thesis of a healthy economy and a robust market for energy!

Two data points do not make a trend, but it does not take much to scare markets that have been on such a tear as the stock market and energy stocks have been on in recent months.  In particular, stocks have rebounded from the blues in spring presumably on the faith that the economy is fine and strong enough to keep absorbing higher energy prices, higher interest rates, and increased uncertainty on the geo-political front.  Energy stocks have obliged this thesis by keeping pace with the rest of the stock market, again, presumably because the economy appears healthy enough to keep paying the tab for higher oil prices.  Now, Economics 101 tells us something has to give at some point.  Last week some folks finally started to contemplate that this self-reinforcing march upward is beginning to break down.  Me-thinks the jig is not up yet.

Almost five months ago, many folks scoffed and laughed when a Goldman Sachs analyst  predicted peak oil prices $100 and over.  A barrel of oil cost a little over $50 then and already it is pushing $70.  When Chevron announced a mega-deal to acquire Unocal merely days after this report, oil seemed a lock for a peak.  I read just such calls in many publications, including Barron's.  Even folks who predict high prices in the short-term continue to see big drops in prices on the horizon for 2006, 2007, or just a little later - even if they continue to hike up expectations of "equilibrium" prices (remember in 2003 when analysts laughed at higher oil prices in the face of the Iraq invasion?).  Based on these bearish long-range expectations for oil prices that I continue to hear from analysts (click here for the latest example from a BBC article or click here for a BusinessWeek article highlighting the contrasting opinions from experts), it is hard for me to believe that sentiment in this sector has yet reached its highest of highs.  As an example for contrast….when the bubble popped in stocks back in 2000, just about everyone had concluded that stocks were going to infinity in short order!  There was little expectation of some kind of peak and subsequent substantial pullback as I continue to see in predictions for oil prices in the coming years.

I have stated before that I will not believe in a peak in oil until I see some behaviors change in consumers.  Folks have been good at complaining but bad at actually doing anything.  The President recognizes that there is not much he can do (or is doing) to help things in the short-term and claims that this latest energy bill contains a long-term strategy to a healthy environment for energy consumption.  Certainly, time will tell, but in the meantime, I will roll with what I see in the here and now.  Folks may be scaling back consumption of retail goods to pay for their gas, but they are not yet at the point of scaling back consumption of the good stuff just yet.  I hereby declare that the July gas demand numbers were but a blip in demand on our way to even higher oil prices.  Let's check back in a few more months!  In the meantime, be careful out there! 


© DrDuru, 2005