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How permanent driving changes will be revealed in future gasoline demand numbers
by None
Midland Reporter-Telegram
Geopolitical news finally made its way back into the energy market headlines last week. On Wednesday, as television pundits and newspaper reporters wrote about the surprise drop in gasoline inventories, Israeli Prime Minister Ehud Olmert announced he will not seek re-election at his party's primary in September.
The explanations for Olmert's announcement are varied, but most chock it up to multiple, ongoing corruption investigations. This makes the Prime Minister a lame duck. As such, the work that Israel has done toward negotiating a Mideast peace accord is ostensibly put on hold for the time being. All eyes now turn to the September primary where the ruling Kadima party will pick a new leader who will have until October to form a majority coalition. If a coalition cannot be formed, full elections will be held, further delaying any peace process.
The sudden shift in the Israeli political landscape roiled energy markets on Wednesday afternoon. If one were to look at an intra-day chart of the price action, you could see that the announcement of Olmert's resignation coincided with a near $6 surge in crude oil prices almost to the minute. This could be because of the delay Olmert's departure would create with respect to the peace process. Other explanations are much darker. Some analysts might say that Olmert's new status as a lame duck somewhat increases the odds of an attack on Iran because it lessens the political consequences of such a decision. Others say that the change in leadership, coupled with the upcoming U.S. presidential election, creates too much uncertainty as to the likelihood of a peace accord or of military intervention in Iran. Either way, markets have always hated uncertainty and Wednesday was no exception as prices surged on the news.
All of the other news affecting energy markets until Prime Minister Olmert's resignation had been bearish. Further evidence of demand destruction in previous weeks had led to a complete collapse in energy futures. Crude oil, which gets a majority of the headlines, had sold off from a high of more than $147 on July 11th to within an earshot of $120 on Tuesday this week. Tuesday's sell-off took crude oil through one of its strongest support levels at the $122 level.
Many thought more bearish news on Wednesday could take crude down another $10 before reaching its next support. Unfortunately for traders on the short side, Wednesday's news was not nearly as bearish as they hoped. Before news of Prime Minister Olmert's resignation had even hit the news wires on Wednesday, the Department of Energy released its weekly Petroleum Status Report. The key data, as it has been for weeks now, was the gasoline data and specifically the demand data. How much was on hand, how much was produced, how much was imported, and especially how much was used were all scrutinized.
Television pundits like to say that the fall in gasoline inventories caused the markets to rally. In fact, the inventory number is just a snapshot of stockpiles at a certain time. To understand energy markets, one must figure out why gasoline inventories dropped. If production and imports never change, drops or builds in inventories would be easy to interpret. In the final analysis, there were two important parts to the "why" story last week.
First, imports of gasoline fell off by 100,000 barrels per day, a deficit of 700,000 barrels in a week, or 20 percent of the inventory drop. That alone would be very bearish because it indicates further demand destruction. However, the other piece, and undoubtedly the most important, was the gasoline demand number, which increased some 300,000 barrels per day above last week. That amounts to more than 2 million barrels in a week and accounts for 60 percent of the drop in inventories. This is the largest increase in weekly demand for the entirety of the calendar year and definitely set a bullish tone for the energy markets before the geopolitical news broke later in the morning.
In the coming weeks, it will be increasingly important to watch the gasoline demand number.
Many traders have made assumptions that the demand destruction that we've seen this summer is indicative of a permanent change in consumption patterns by Americans. If they're right, it's bearish. However, if this week's up tick in consumption continues into the coming weeks, it could point to the conclusion that Americans only made temporary adjustments to their habits and may revert back to their old ways as gasoline prices fall back below the $4 per gallon level as they did last week.
Portions of this article were produced by Nathan Golz, Futures Researcher. Its publication is a collaborative effort and the information is obtained from sources considered reliable, however accuracy is not guaranteed by A.G. Edwards. Past performance is not a guarantee of future results and additional information is available upon request (432)684-7335. A.G. Edwards is a division of Wachovia Securities, LLC.
The explanations for Olmert's announcement are varied, but most chock it up to multiple, ongoing corruption investigations. This makes the Prime Minister a lame duck. As such, the work that Israel has done toward negotiating a Mideast peace accord is ostensibly put on hold for the time being. All eyes now turn to the September primary where the ruling Kadima party will pick a new leader who will have until October to form a majority coalition. If a coalition cannot be formed, full elections will be held, further delaying any peace process.
The sudden shift in the Israeli political landscape roiled energy markets on Wednesday afternoon. If one were to look at an intra-day chart of the price action, you could see that the announcement of Olmert's resignation coincided with a near $6 surge in crude oil prices almost to the minute. This could be because of the delay Olmert's departure would create with respect to the peace process. Other explanations are much darker. Some analysts might say that Olmert's new status as a lame duck somewhat increases the odds of an attack on Iran because it lessens the political consequences of such a decision. Others say that the change in leadership, coupled with the upcoming U.S. presidential election, creates too much uncertainty as to the likelihood of a peace accord or of military intervention in Iran. Either way, markets have always hated uncertainty and Wednesday was no exception as prices surged on the news.
All of the other news affecting energy markets until Prime Minister Olmert's resignation had been bearish. Further evidence of demand destruction in previous weeks had led to a complete collapse in energy futures. Crude oil, which gets a majority of the headlines, had sold off from a high of more than $147 on July 11th to within an earshot of $120 on Tuesday this week. Tuesday's sell-off took crude oil through one of its strongest support levels at the $122 level.
Many thought more bearish news on Wednesday could take crude down another $10 before reaching its next support. Unfortunately for traders on the short side, Wednesday's news was not nearly as bearish as they hoped. Before news of Prime Minister Olmert's resignation had even hit the news wires on Wednesday, the Department of Energy released its weekly Petroleum Status Report. The key data, as it has been for weeks now, was the gasoline data and specifically the demand data. How much was on hand, how much was produced, how much was imported, and especially how much was used were all scrutinized.
Television pundits like to say that the fall in gasoline inventories caused the markets to rally. In fact, the inventory number is just a snapshot of stockpiles at a certain time. To understand energy markets, one must figure out why gasoline inventories dropped. If production and imports never change, drops or builds in inventories would be easy to interpret. In the final analysis, there were two important parts to the "why" story last week.
First, imports of gasoline fell off by 100,000 barrels per day, a deficit of 700,000 barrels in a week, or 20 percent of the inventory drop. That alone would be very bearish because it indicates further demand destruction. However, the other piece, and undoubtedly the most important, was the gasoline demand number, which increased some 300,000 barrels per day above last week. That amounts to more than 2 million barrels in a week and accounts for 60 percent of the drop in inventories. This is the largest increase in weekly demand for the entirety of the calendar year and definitely set a bullish tone for the energy markets before the geopolitical news broke later in the morning.
In the coming weeks, it will be increasingly important to watch the gasoline demand number.
Many traders have made assumptions that the demand destruction that we've seen this summer is indicative of a permanent change in consumption patterns by Americans. If they're right, it's bearish. However, if this week's up tick in consumption continues into the coming weeks, it could point to the conclusion that Americans only made temporary adjustments to their habits and may revert back to their old ways as gasoline prices fall back below the $4 per gallon level as they did last week.
Portions of this article were produced by Nathan Golz, Futures Researcher. Its publication is a collaborative effort and the information is obtained from sources considered reliable, however accuracy is not guaranteed by A.G. Edwards. Past performance is not a guarantee of future results and additional information is available upon request (432)684-7335. A.G. Edwards is a division of Wachovia Securities, LLC.
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