Monday, March 30, 2009

Oil prices and aggregate demand

Oil closed out the month on a down slope, tumbling on the strengthening of the dollar and a weaker outlook for equities. On a larger scale, the story with oil over the part 3 months or so has been the larger macro forces completely overwhelming the oil-specific supply and demand issues. For example, the market has largely been unresponsive to OPEC's desperate attempts to prop up oil prices; currently, it's estimated to be running under capacity by ~6MM barrels. A lot of oil traders believe that OPEC won't be able to hold themselves to their production cuts and the rest believe that the macro-imposed demand constraints are a much stronger force. As an example of these macro demand shocks, it would be good to look at our posts on Japanese demand and dry shipping.

ZH believes that the oil market is following the lead of the other major markets and is overestimating the probability of a recovery in a relatively current timeframe. Here is the May 09 West Texas crude contract over the past month:

Given the basis on oil has been pretty negligible recently, this is a good contract to track. Going forward, oil is going to continue to be driven by the strength of the dollar and the short term outlook for equities. As we believe that we aren't anywhere close to being out of the woods, it's unlikely for spot oil and near contracts to go much higher than the $55 level.
Sphere: Related Content
Print this post


OhmeOhmy said...


Not unlike the battered and bruised thoroughbred "Well Armed" you are showing exceptional promise.

I'm starting to look forward to your stories. Keep 'em coming.

DUBAI, United Arab Emirates — Well Armed ran away with the $6 million Dubai World Cup by a record 14 lengths.
Well Armed

An American equine named "Well Armed" taking the stakes from Dubai, whoda-thunk it but at the same time very symbolic.

Don't try to master what we do too quickly.... We're well armed and miles ahead of you.

slick willy said...


in NYC, gas has held steady at $2.2ish during the last $12 of the barrel climb.

not so quick vlad & hugo & abdullah

SCOoop me up scotty

Advant Guard said...

The text says Brent crude but the picture says Nymex, which trades West Texas Intermediate as its benchmark.

Cornelius said...

Good catch, thanks. Was originally going with a Brent crude chart.