If supply is short and demand is high, prices will rise. Simple economics, right? Wrong; in this case although supply for oil is significantly down and prices are on the rise once more, consumer demand in the US for gasoline has continued to fall consistently for the last eight months to the point where it reached a four month low on Tuesday.
The U-turn on the price of a barrel was triggered by a weekly report from the US Department of Energy, published on Wednesday, saying that US reserves of gasoline – or petrol, depending upon your regional dialect – had fallen by 6.4 million barrens over the week ended August 8. “It's maybe the most bullish report we've seen ... all year, just in terms of a one-week surprise,” said Brad Samples, an analyst with Summit Energy, as quoted by Dow Jones Newswires.
However, the inventory drop is not acting unilaterally. It is surrounded by a supporting cast of a stalling US economy, fighting in Georgia - which has disrupted two pipelines and a tropical storm - named Edouard – who have all helped contribute to the price hike.
This grossly underestimated decline in stockpiled oil reserves and the secondary contributing factors acted as an immediate catalyst for the market.
In New York, on Wednesday, light sweet crude for September delivery was up $2.82 to £115.83 a barrel.
Similarly, in London, Brent North Sea crude for September delivery gained by $2.06 to $113.21.
The trend continued on Thursday as refinery throughput decreased, with oil rising nearly another dollar in New York, closing at just under $117 a barrel. Following on from a period during which prices fell consistently, the sudden price increase can be primarily attributed to the reopening of a still extremely fresh wound - supply concern.
The fall in gasoline stocks was much larger than analysts' had originally forecast of a 2.1-million-barrel decline. Distillate stocks also unexpectedly decreased.
At the same time that the International Energy Agency (IEA) is forecast a steep drop in oil demand through the western world, and the US is experiencing its sharpest drop for 26 years, non-industrialised nations are experiencing a rise in demand by on average 1.3m barrels per day (bpd), for the first half of 2008.
One reliable indicator of demand in the U.S. is the motoring industry. Americans drove 12.2 billion miles, 4.7% fewer milies, in June than they did during the same month last year. This news was reported by the U.S. Transportation Department on Wednesday at a time when drivers are being forced to cut back on trips due to high gasoline prices.
Despite the crash in demand, crude futures remain more than 15% higher than they were at the start of the year when they surged past $100 for the first time in history.
Traders are now watching OPEC to see if it will cut back on oil supplies on the back of comments made by Iran's OPEC governor, Muhammad Ali Khatibi, on Tuesday that the organisation should trim its oil output if demand continues to fall in slowing industrialised economies.
