The Foolish Oil Outlook

The topic of rising oil prices keeps making the front page and the nightly news. T. Boone Pickens is setting $150 as a target price, Goldman Sachs (NYSE: GS  ) sees $200, Gazprom (OTC BB: OGZPY.PK) makes the call for $250. But the last thing you need is another opinion about how high crude is headed. I don't take any sole price target too seriously, and you're sure as heck not going to hear one from me.

I am, however, interested in the supply-and-demand fundamentals behind the forecasts. Over the past two days, a few useful reports have come out to help us Fools figure out the market forces at work.

First, on Tuesday, came two separate oil demand-related releases. The International Energy Agency lowered its 2008 demand forecast slightly, while the U.S. government noted that global demand growth came in far less than the expected million-barrel-per-day bump. American fuel consumers, who feel price pressures much more acutely than do end users in heavily subsidized markets, drove the deceleration.

Subsidizing fuel is becoming a costly burden for governments around the world. Malaysia and Indonesia, just to name two, are making significant price adjustments. Still, big boys such as China have so much cash in their coffers that fuel demand can be kept artificially high for quite a while longer. Those low prices are putting Chinese refiners such as PetroChina (NYSE: PTR  ) and China Petroleum & Chemical (NYSE: SNP  ) in quite the profit pickle -- but they keep the people happy.

On Wednesday, we heard a bit of news on the domestic supply front. Oil inventories dropped far more than expected this week, despite lower refinery utilization.

Oil prices rose yet again yesterday, but think about the implications here. If refiners such as Valero Energy (NYSE: VLO  ) are running at lower capacity, one would expect inventories to hold up relatively better. If refiners are drawing on their inventories, that suggests that they expect demand to weaken going forward. Just something to think about before you go snapping up shares of the U.S. Oil Fund (AMEX: USO  ) exchange-traded fund.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 12, 2008, at 5:28 PM, nthamoeboid wrote:

    http://www.bp.com/sectiongenericarticle.do?categoryId=902377...

    BP is reporting world oil production has dropped 0.2% when oil prices are relatively high.

    It looks like oil prices have a very good reason to stay high. Oil demand is high. It is getting reduced due to high prices and spot shortages, but nevertheless, it is still being projected to grow overall. We know oil production has gone down in 2007 vs 2006. There is little evidence that 2008 will see higher production. We are seeing in the past 3 years major delays in new oil production. This trend is still continuing with the largest new oil field Kashagan being delayed, again. Mexico oil production has been dropping rapidly and due to political reasons, they are unable to do much about it. Norway and Russia are both reporting production drops and have no short term boosts.

    The picture is quite bullish from the production side of the oil story.

    We are not seeing enough reduction in demand to see oil prices go down in the short term.

  • Report this Comment On June 13, 2008, at 1:05 AM, LynchFan wrote:

    As always....The hedge funds and money managers will continue to wring evry ounce out of this "Suppl/Demand" story. We all know its speculation One only look to the Nymex site to see that energy contract volumn has doubled over th e past two years. Has world demand doubled? No, ut the prie sure as heck has,

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