Soft Demand Driving Oil Prices Lower

U.S. oil prices topped $50 a barrel in June, boosting optimism a two-year price rout might end. Six weeks later, the long hoped for recovery has yet to take hold.

Mounting fears that demand has fallen short of expectations as production increases and rig counts rise has analysts believing that any oil price recovery may be a year or more in the future.

The demand response has been slower than bulls had hoped. U.S. drivers have covered fewer miles than expected this summer, and as they speed toward the Labor Day holiday in September, the overhang of gasoline in storage may put downward pressure on crude and refined product prices.

“Right now, the only thing that would drive prices higher is robust demand,” said John Paisie, executive vice president at Stratas Energy Advisors, a Houston-based consultancy. The growth must be across the board, for products including distillates like diesel and jet fuel, as well as gasoline.

“Demand just can’t be made up by one product,” he said, and demand for diesel has been lagging.

Instead of seeing $60 a barrel, which would support an increase in production, the demand questions, and ongoing supply concerns, mean oil could fall further. U.S. crude settled at $43.13 on Monday, after earlier hitting a three-month low.

“Demand is growing very moderately,” said veteran oil economist and independent consultant Phil Verleger. “There’s no real surge to it – call it the great moderation.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza