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Wednesday, January 09, 2008

Oil -- The Disappointment of Great Expectations

The EIA’s weekly petroleum data is out. And it shows us that market sentiment is a funny thing.

We saw U.S. crude inventories drop by 6.8 million barrels in the latest week, much more than the 2.1 million barrel drop expected by analysts. Even so, oil prices fell on the news.

Why? It’s an expectations game. We’ve seen bigger-than-expected drawdowns week after week, so traders are starting to price a “surprise” in. And they sell on the news, whatever the news is – even when it’s bullish.

Meanwhile, here’s something I find interesting. Motor gasoline demand over the last four weeks has remained 9.3 million barrels per day. Not only is this unchanged from recent trends, it’s up 0.4% from the same period last year. So much for economic weakness and higher gasoline prices affecting Americans’ driving habits. It may be that in our car-centric society, Americans are finding it impossible to drive less, even if they have to pay more at the pump.

In this case, rising gasoline prices will quickly lead to cutbacks in other purchases, as consumers direct more of their money toward gasoline purchases. That could translate into bad news for retailers.

My target for oil this year is $150, as
you can read here. And it may be on the low side.

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