Oil Down on No News

With a lack of signals coming from analysts and virtually no news that could have an impact on crude prices, oil has again suffered moderate setbacks today.

Confounding investors who lack any fundamentals to trade on, Wall Street again witnessed a pull back affecting US crude oil prices.

Analysts say absolutely any news is good for supporting oil. When unemployment figures rise, crude offers a safe haven for investors fearing an economic slowdown, while any improvement in the economy signals potential for increased demand.

The political environment in the Middle East has been subdued with few events to report in recent days. A lack of refinery shut downs or fires, and virtually no attacks on pipelines in the world would normally convey an ample supply but investors are wary to pull out of oil because if the price drops precipitously it could improve consumer sentiment thereby driving speculation that demand will improve.

The dollar was unchanged against the Euro today which further confounded investors. As the dollar falls, the cost of oil in US dollars usually rises in world markets. If the dollar rises in value its additional power to depress oil is curbed by investor enthusiasm that the economy is on the rebound.

Looking at statistics from the last twenty years it appears that oil supply has kept up with demand. And even today oil is not being used faster than it is produced. Speculators have managed to squeeze the market to an incredible degree considering the steady supply as stated by Saudi Arabia’s oil minister. Obviously pleased that oil has remained well above the $75 a barrel that they consider a fair price, the Saudis insist that supply is keeping up with demand. Indeed the number of luxury sports car imports to Saudi Arabia has almost tripled in recent years and Dubai provides $400,000 Lamborghinis to their police even as most country’s economies struggle.

Iran has also managed to maintain ample exports despite western efforts to curtail Iranian supplies. China and Iran have been easily able to skirt sanctions through the use of shadow oil companies, shady financial instruments and by having oil tankers turn off their beacons to avoid detection. With new strategies being formed by buyers and sellers there has been minimal affect on the supply of oil coming out of the Middle East. “It’s business as usual”, says an Iranian businessman who asked not to be named since he likes his name and didn’t want to change it to avoid a travel ban.

Also not affecting the price of oil is the lack of volatility recently. When the price of gasoline increases so does the purchase of fuel efficient cars. But as noticed in 2008 with the sudden drop in fuel costs, large SUV sales surged, increasing demand and pushing oil prices upward. By early 2009 people could not give their Chevy Suburbans away. “Equilibrium has been reached where people who can afford their gas guzzlers are helping to keep oil prices up, while people who cannot afford higher fuel costs keep searching for more fuel efficient vehicles thereby reducing demand,” says an economic analyst in the US. “Any change in the cost of oil will push the pendulum in the opposite direction and reverse the change.”

The unpredictable nature of current economies is also putting a hold on oil prices. Early Tuesday the Euro was set for a rebound after the ECB announced a possible reduction in interest rates but was later offset as the EU discussed new austerity measures to help balance national budgets while at the same time offering new stimulus spending guidelines to help spur the economy. By Wednesday Europe was worried about a triple-dip recession.

On Thursday afternoon the outlook brightened with data showing tepid improvement in US employment after falling in the morning hours on US manufacturing data. “Our facial muscles are getting quite a work out,” Robert Errington, a financial advisor to the British delegate of the European Convention on Economic Stimulus and Austerity said after a stressful meeting with other European leaders on Thursday. Many of the delegates headed directly for the pub across the street immediately following the meeting.

Any improvement in the economy seems to be met with a sudden rise in the cost of oil, sapping the efforts of stimulus spending and removing the incentive to ease interest rates. As the unemployment rate rises and the economy falters, the price of oil retreats just enough to give the average worker hope. “If gasoline goes up, I can’t afford the commute. I had to take a week off in February when gas prices went sky high,” said a factory worker from California who wished to remain anonymous because he told his boss he had the flu. “Every time I get a job the price of gas goes up!”

Other indicators with mixed signals have also created much uncertainty in the direction of crude. Low oil inventories after refineries take delivery are often replenished after the next tanker arrives, leaving investors anxious about the next hour inventory reports. “Every time a tanker unloads it’s going to be another hour or two before the next one”, says oil trader Jack Perry. “ You’ve got to get in and out, timing is everything. If a seagull distracts a ship’s captain, I want to know about it.” Perry has been very successful trading oil and says even a whale delaying a tanker’s entry can affect global prices.

For now many Americans are holding their breath, not sure if they want the economy to improve too quickly out of fear that gasoline prices will outpace any improvement in employee compensation. But analysts argue that those fears are unheeded because any rebound in the economy will likely be met simultaneously with the dampening affect of price increases in energy so it is unlikely that GDP growth will exceed 3% for the foreseeable future or that oil prices will rise dramatically either.

UPDATE: As news of this news reached markets, oil began climbing again.