Thursday, March 26, 2009

Oil Prices Up, Demand for Oil Down . . . . Why?

Recent upward trends in oil prices -- in the middle of a recession's low demand for oil -- can cause questioning persons to squint their eyes and mouth, "WTF?!?" Here is one easy to understand explanation:
Oil prices have been rising steadily over the past few weeks, and are up 20% since the start of the year. Yet US oil inventories have also been rising, and are now at their highest level since July 1993. Stocks have risen in 22 of the last 26 weeks....

....The rationale for the disconnect between weak oil market fundamentals, and higher prices, lies in financial market sentiment. Traders continue to believe, as they have all year, that demand is just about to recover. A clear sign of this is the forward premium in futures markets, where the March 2010 WTI futures contract is $10/bbl above today's high price. _Source
This is the same type of trader - led upsurge in prices that created a lethal shock to the global economy last summer. Oil traders are thrashing about for some way to take a profit -- any profit.

The fact that rising prices in a time of naturally low demand will create an even deeper demand destruction than currently exists, is not relevant to the traders' thought processes.

Understanding how susceptible markets are to trader psychology is important for investors trying to see through the fog to near-term and medium-term economic trends.

The US Congress is responsible for much of the chaos in financial markets -- so don't look to Congress for any quick (or even slow) fixes. Congress is in the business of taking bribes and helping its friends. The interests of the people really do not signify.

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