The Energy Report Friday July 16, 2010

Capped!
By Phil Flynn, PFGBest.com

Great news for the oil industry and all of America and the world! The leak in the Gulf is capped! Finally for the first time since the Deep Water Horizon exploded back in April, there is no oil leaking from that deepwater well. Still BP and the government are not celebrating just yet. The company continues to worry that higher pressure inside the well could cause of explosions in other parts of the pipeline and is monitoring the well by checking pressure every 6 hours. Let’s keep our fingers crossed and say a prayer.

What traders really want to know is the well really capped? Over the last few days the oil market seems to have taken a leadership role in leading the stock market higher and the rest of the world lower. As of late oil traders are taking a more skeptical take on the global economic recovery because despite the slew of good feelings that permeated the marketplace to start the week in the oil patch the facts just does not back those gushy feelings up. The week of old fashion supply and demand fundamentals for the oil market does not bode well for the upside in the oil market or for the economic recovery over all. Whether it is reports from the Department of Energy, the International Energy Agency or OPEC themselves, if you read between the lines the outlook is less than supportive.

The Energy Information Agency of the Department of Energy report from the demand side for one was very disappointing. The EIA reported that last week oil demand plunged to the lowest level since last April while supply is well above average. Week over week the drop in distillates supply had the biggest drop since the beginning of the year. We saw the normally supply side focused International Energy Agency basically say this week that supplies are just fine.  I mean the IEA actually said that they expect oil demand to slow next year in China and most other parts of the world. The IEA forecasts that world oil demand will grow by 1.3 million barrels a day which h is or 1.6% increase.  The IEA said it expects total Chinese oil demand to rise by only just 4.8% next year. This year China demand increased by growth of 9.1% this year. Over all the IEA says the global growth rate is less that this year’s growth of 2.1%. So now if we already have a global glut of oil and demand growth slows won’t prices go lower?

The International Energy Agency, which normally is screaming for more investment, warned that a drop in oil investment would create a price squeeze yet seems less concerned. The IEA says that capital expenditures witch did dropped by almost 20% last year should rebound by 10% in 2010. The IEA seems less concern about tight supplies so why should we not be.  The agency tried to bring credibility to the peak oil debate and is now blasé about supplies so should we not be as well?

Even OPEC and their market assessment on the oil market do not bode well for higher prices. OPEC says they expect demand to creep higher not leap higher. OPEC says that demand for crude will grow only by a measly 1.2 percent. That is just over a million barrels per day. That is not the time of growth that will cut into the global oil supply. And do not expect OPEC to be able to reduce production. OPEC revenues are tight and compliance will continue to slip. They no real control.

Now throw in fears of a double dip recession and the oil outlook is less bullish. Of course the fears of a double dip recession could be supportive to oil as well.  As the Federal Reserve said in their Fed minutes,  if the economy took a turn for the worse there would be more stimuli which is the best hope for bulls to keep oil from collapsing. More stimuli means a weaker dollar and a fake crutch for prices.

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