Financial Watch

For the second straight week the Department of Energy announced crude oil inventories rose. This unusual occurrence comes right near the peak in the summer driving season. Inventories remain well above last year’s levels and nearly 10% above normal levels for this time of year. Further reinforcing Financial Watch’s bearish view on the oil markets is a significant revision to the Department of Energy’s projections for oil demand. Previous estimates placed demand growth at a fairly robust 2.2 million barrels per day. Earlier this week, the figure was revised to a more moderate 1.7 million barrels per day. Apparently high oil prices are beginning to alter consumer’s driving behaviors.

Despite growing inventories, energy traders continue to drive oil prices higher. Oil prices set an intraday record earlier today at over $64/barrel. Concerns over refining capacity continue to raise concern over whether demand can be met later in the year. While this concern has some merit, it is largely flawed. Crude oil prices are a raw material that goes into the final product, but oil needs to be refined in order to be of any value to consumers. Such a situation should not impact crude oil prices, but rather we should see price increases for the final product coming from the refiners since that is where the shortage is occurring. Refiners will only purchase a quantity of crude up to refining capacity. Since crude oil is an input, supplies intended to meet final consumer demand will remain floating in the market until refiners have sufficient capacity for the good. By examining crude oil demand in terms of the supply chain, logically insufficient refining capacity should create downward pressure on oil prices.

Financial Watch continues to believe oil prices will retreat by the end of this year. However, persistent speculation in the oil markets is causing us to revise our end of year forecast higher. Financial Watch now believes oil prices will end the year in the $50-$55 range.