High-and-Low with Oil Prices
Crude oil prices pierced the $50 a barrel level Thursday for the first time since Dec. 1, 2008, but they don't belong there. West Texas crude for April delivery was recently up $2.40, or 5%, at $50.54 a barrel on the New York Mercantile Exchange, and Brent was gaining $2 at $49.66 a barrel. Prompting the jump in oil prices is U.S. dollar weakness. The U.S. Dollar Index, an indicator that measures the value of the dollar against a basket of international currencies, was recently sliding 1.5% to 82.92. Downward moves in the U.S. dollar usually lead to upward moves in oil prices because oil is denominated in U.S. dollars on the global marketplace. Thus, the uptick we are seeing in crude prices Thursday is justified.
However, $50 a barrel crude oil is not justified. This is not a feeling, a belief or a psychic rumination. It is a fact. The current fundamentals of the crude oil market do not justify $50 crude oil. In fact, the fundamentals of the global marketplace suggest that crude should be trading around $30 a barrel, maybe even $25 a barrel. What are these fundamentals? A lousy economy and lousy global demand. The economy is a wreck. Nobody is buying anything, so nobody is making anything. That means that nobody is buying crude oil. Wednesday's weekly petroleum report by the Energy Information Administration demonstrates this clearly. Total stocks -- already well above the five- year average range -- rose by another 2 million barrels last week (and will probably require an upward correction when the real numbers come out in two months).
Motor gasoline was the only product to see an increase in demand last month, by a mere 1.1%. Distillate demand fell 9.3%. Jet fuel demand fell 6.4%. Total products supplied last month equaled 19.1 million barrels per day, 3.2% less than the same period last year. Analysts I spoke to on Thursday are flummoxed about the current state of the crude market. Energy analyst Stephen Schork, now attending the OPEC meeting in Vienna, said via telephone that "from a rational standpoint, I am very bearish on crude oil, but there is clearly a bullish tone to the market that I simply can't understand." Phil Flynn, director of commodities at Alaron Trading in Chicago, introduced a daily research note by saying that the Treasury Department's decision on Thursday to buy $300 billion in U.S. Treasuries "flipped the commodity complex and saved the oil bulls from a wildly bearish Department of Energy supply report." Flynn added that traders who were seeing a light at the end of the economic tunnel actually saw "a freaking freight train that caused a historic drop in yield and a major swing in Treasury bonds and precious metals." James Williams, energy analyst at WTRG economics, called the uptick in crude oil prices "laughable." Energy stocks are thoroughly enjoying Thursday's rally in the commodity pits. BP ( BP) was recently gaining 2.6% at $40.99 a share; Chevron ( CVX) was up 2.5% at $68.23 a share; ConocoPhillips ( COP) was 3.6% higher at $39.65 a share; Royal Dutch Shell ( RDS.A) was nearly 1% higher at $46.08 a share, and Exxon Mobil ( XOM) was fractionally higher at $69.21 a share. However, the confusion being professed by most energy analysts puts the midterm future of these stocks into question. History suggests that global energy markets will invariably be forced to account for supply-and-demand fundamentals. If this event can wait until the economy turns around and oil consumption rises, energy stocks might be able to sustain current values. If not, equity values will probably drop like a rock, as will the price of oil and petroleum products.