The market's slide continued last week. We must admit this is one of those periods in which several usually good indicators have not been terribly accurate. So we must put them aside for a while and instead pay attention to what is really moving the markets, and that is oil.
Just a few months ago, no one believed that oil would be selling for more than $140, and yet today it is. Even though the U.S., along with the rest of the developed world, is doings its best to conserve oil, so far it's not good enough. In the first half of this year, the developed world cut back on its consumption. Yet, because demand rose in Asia and other developing regions, oil inventories actually fell.
The U.S. is the largest consumer of oil in the world. If we were to cut our consumption by 10%, that would only save two million barrels a day – roughly equal to two years worth of oil demand growth. That could be a lot or a little, depending on how much new oil production comes online over the same time. But the outlook in that regard is not good. Right now, it looks like oil supplies over the next two years will grow by zero or less.
As we have been saying, we are not in the cheap oil days of the 1990s anymore. We're not even in the 1970s, when oil was plentiful but held hostage for political reasons. Instead, we are facing systemic problems which cannot be easily solved.Read more...
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