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Oil Bulls Fret Weekly Inventory Data

The U.S. Energy Information Administration will release its weekly report on domestic crude oil inventories.

The U.S. Energy Information Administration is set to release its weekly report on domestic crude oil inventories at 10:35 a.m. Wednesday. While the weekly EIA report focuses on oil inventory numbers, they also include other data on oil supply and demand.

Oil markets have been taking huge hits from a growing stream of new data pointing to falling oil consumption levels in the U.S and Europe. The chances of a tumble due to any bullish crude oil news from the upcoming EIA analysis are slim.

On Tuesday the

Nymex crude pit

took a severe beating because of bearish oil data in another EIA publication, and crude oil doesn't have much to look forward to with the quick release of more oil supply and demand data from the energy watchdog. Net-long oil traders had come to relish the EIA's active publishing schedule when crude prices were soaring to record highs every other week. Now, bullish oil traders are likely to look forward to the weekly inventory reports the same way they anticipate trips to their dentist.

Last week's inventory report, released Wednesday, Aug. 6, estimated that oil consumption during the four-week period ending Aug. 1 fell 20.1 million barrels, or 2.6%, relative to the same period in 2007. Consumption for the week ending Aug. 1 was said to have dropped 4.1% year-on-year.

Tuesday's EIA publication actually took a stab at guessing what Wednesday's results will look like. The Short-Term Outlook predicts that daily petroleum consumption for last July was 20.32 million barrels a day, sliding to 20.32 million barrels per day in August. If its predictions for last July and August prove correct, June consumption will have fallen 430,000 barrels year-over-year, and August levels will fall again by another 300,000 barrels per day.

Thus, Wednesday's data will probably show that last week's consumption figure fell sharply from its level during the same week last year. Having now suffered through a precipitous $35 price decline since mid-July, crude markets have assumed an awkwardly submissive position and now enter the daytime trading sessions on downward slides on the release of bearish data. Crude's latest situation lies in stark contrast to the role that it had played as a rapid-growth investment vehicle when commodities were strong.

Refresher: Tuesday's Short-Term Outlook

Tuesday's EIA analysis reported a stunning drop in U.S. oil consumption during the first six months in 2008. Domestic consumption was estimated to have fallen 800,000 barrels per day compared with the same period in 2007, caused by slower economic growth and high oil prices.

The EIA stated that the decline "was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 bbl/d."

Petroleum Consumption and Price

Click here for larger image.

Crude oil's rise from $18 to $35 a barrel during the 1979-1981 time span as a result of the Iranian Revolution caused the first-referenced fall in consumption. The 1981 price spike caused a "demand destruction" trend in the early 1980s similar to what are seeing now, according to Jim Williams, energy economist at WTRG Economics.

The 1981 oil price spike and its effect on U.S. oil consumption are both represented in the above chart. The loss in oil demand caused by the 1970-1981 price escalation proved to be a devastating blow to the entire U.S. energy industry. It took the oil companies more than 20 years to erase the consequences of that price spike and get back to its 1979 oil production level.

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Projecting, and Revising

In hindsight, the EIA's price analysis over the last year was considerably more realistic than the larger steam of sensational price forecasts pumped out by gangs of funds and firms so that their own huge oil bets could get juiced up by the market's rising hysteria.

Late last winter, when crude oil pits decided to quit feigning uneasiness with their newfound popularity, the EIA casually started to print research reports that showed that traditionally rock-solid U.S. demand for petroleum products like motor gasoline and jet fuel was beginning to buckle under the weight of soaring oil prices.

However, the EIA's latest hard data on oil consumption levels show that even its own conservative forecasts made last Spring were strongly biased to the upside. The data have uncovered some major dents to the global economy caused by two years of record high oil prices that were formerly overlooked as minor dings and scrapes.

The latest's week's figures in each weekly petroleum report mostly rely on estimates and predictions that can't be validated until two or three months after the first numbers are originally released. Economist Jim Williams says that the most recent string of EIA reports have all recorded large downward revisions to their previous consumption predictions.

For example, last week's EIA petroleum report also included corrected consumption figures for the month of May. The corrected figures for petroleum-based commodities were all sharply lower than first thought -- gasoline consumption was revised down by 1%, jet fuel was 2.7% less, distillate fuel oil (diesel fuel) consumption was 4.6% less, and residual fuel oil was 4% less than the original report estimated. The EIA's revised number for total petroleum consumed in May was 667,000 barrels per day less than the original estimate, according to Williams' analysis.

Williams predicts the same thing is going to happen to the EIA's consumption figures that it is releasing now. He suggests that last week's report that oil consumption for the week dropped 4.1% year-over year will probably have to be revised downward further -- by another 4% or 5%. "Last week's figure (of a 667,000 barrel fall in consumption last month) will ultimately likely be revised down by another 750,000 barrels per day, which is really an astonishing figure," Williams said.

Dented Demand

The same issue pertains to the petroleum consumption forecasts the EIA made in its monthly analysis released Tuesday. The report's claim that U.S. consumption for the first half of the year was 19.91 million barrels per day -- down 800,000 barrels per day from the first half of 2007 -- is likely fairly accurate in hindsight. However, its prediction that consumption in the second half of 2008 will average 20.49 million barrels of oil per day -- a decline of 230,000 barrels per day year-on-year -- will probably be in need of a major correction when the true figures come out in the fall.

Thus, even if the figures that the EIA releases today show surprisingly large falls in consumption, it would not be unlikely to have to add another 500,000, 750,000, or even a million barrels of destruction to daily U.S. oil demand.

"We haven't had petroleum consumption decline this much since the period after the Iranian Revolution in 1982," says Williams. "These demand levels are not going to pop back up even if crude prices do slide to $60 a barrel by next year as some analysts are predicting. This demand destruction is permanent, just as it was in the early 1980s."

The long-term consequences of this trend cannot be more highly stressed. By now, almost every weekly EIA report is unveiling new consumption losses measuring half a million to nearly one million barrels of oil per day. The U.S. consumes about 23% of all the oil that is produced on earth, and it is now shedding consumption at a rate of about 0.2% of total global production a week.

The EIA is probably the most adept energy monitor on the planet -- most countries have nothing close to being sophisticated enough to monitor oil supply or demand within their own borders -- let alone globally. Although there are very few quality facilities that provide good data on global demand, one thing can be taken as a certainty. If U.S. consumers, infamous for being the biggest energy hogs on the planet, were wounded so badly by $140 oil that they trimmed their oil intake to the tune of nearly 1% of total global oil consumption in the first half of the year, international consumers everywhere are now making similar adjustments to their behavior patterns that will ultimately pass through as reductions in physical demand for oil -- especially in countries like China where hundreds of millions of its citizens are trying to pull themselves from the dark ages.

The EIA's weekly inventory reports are now transforming into devastating weapons against the crude market. The market already knows that each successive report will probably predict bad tidings in the near term. It should also prepare for the next three or four months' load of reports to be paired up with major surprise revisions to predictions in earlier reports.

The chances that oil will make it unscathed from even one inventory report are slim. For the next few months, if the Nymex is open and it's a Wednesday, you can bet that it will be a bad day for crude oil.