Friday, July 24, 2009

Energy Glut?

Just as I hear from Nashville, TN and Madison, WI that they are having the coolest summer in over a century, the media report evidence of oil over-supply and decreases in energy demand.

1. From the WSJ today: OPEC Braces for Decline in Crude Prices

The Organization of Petroleum Exporting Countries is bracing for a sharp drop in crude prices in coming weeks, as huge reserves of oil-based fuels continue to pile up and the space to store them runs out.

Stockpiles of fuels such as diesel and heating oil are at a 24-year high in the U.S. because of tepid demand from industries and consumers hammered by the global economic downturn. . .

The enormous supplies are pushing available storage capacity to its limit, with some traders reportedly resorting to barges and tankers at sea.

"Inventories are at just ridiculously high levels," said Kevin Rooney, chief executive of the Oil Heat Institute of Long Island, a trade group for heating-oil wholesalers. "I would imagine that just about every available barrel of storage is full."

2. From, July 16: Verleger Sees $20 Oil This Year on 'Devastating' Glut

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”

3. Mish had an interesting post yesterday titled Electrical Demand Plunges in Ontario, Canada; US Demand Expected to Drop 2%.

You will likely find it illuminating.


The 2-year chart of Exxon Mobil Corp. stock is shown. There is no hint of rampant strength. With this price decline and regular dividend increases, the yield is only 2.4%.

Of course, who's to know, but as this blog has documented, economic weakness continues whether or not the "Great Recession" has finally ended.

Forget oil in the twenties: if prices were to merely break
forty on the downside, I would expect XOM's price to fall a good deal more and Treasury prices to move strongly upward (that is, yields would drop in that scenario).

Food for thought.

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