Friday, November 1, 2013

Bear Case For Oil In One Chart

OK, I lied. There are two charts, but I could not pass on providing the price chart for oil, below represented by the United States Oil Fund (Ticker USO), which tracks the price of WTI crude. Crude oil has come under selling pressure lately, and to be honest I am surprised oil gained as much price strength as it did with the economy remaining weak and the alleviation of tensions in the Middle East seen earlier in the year.

The easy bear case for oil resides in the fact that the price broke the 200 day moving average, a negative indication in my estimation. The bear case goes deeper than that though. The following charts shows the difference between the year-over-year growth in oil product related demand (excluding home heating oil, as this demand tends to be more inelastic) and oil production in the US, with GDP growth as a back drop.

Not only is demand falling, but supply is also increasing causing a divergence not seen in more than 20+ years. So as demand falls (is this due to a weakening economy, increased fuel usage efficiency, a combination of both? tough to separate the individual causes but more than likely both), but oil production continues to ramp. Not the greatest backdrop for higher commodity prices.

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