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CNBC Guest Blog
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CNBC Producer Judy Gee contributed to this article.
Like it or not, the energy market seems to be finally trading on the real fundamentals of supply and demand.
Sure, an anticipated surge in emerging market demand, geopolitical events (Mideast tensions, Nigerian militant attacks), as well as the flurry of investors ("speculators") into the oil market helped take crude prices to an unprecedented high just 6 months ago. But today oil prices are trading below $38 a barrel and the equation is clear: rising supply + declining demand = oil prices trading at levels not seen since 2004.
The fact of the matter is, there's a lot of crude oil out there right now -- approximately 325.4 million barrels worth. U.S. oil supplies are near the highest levels in a year and increasing builds in gasoline and distillates have brought even the stubborn bears back from hibernation.
Meanwhile, OPEC—including the de facto leader Saudi Arabia—appears to be adhering to supply cuts. The Saudis say they'll cut an additional 300,000 barrels per day above the December target but it doesn't matter right now. We won't really be able to measure compliance until physical deliveries are made in Asia, Europe and here in the U.S. in about a month and a half.
But as these cuts make their way through the system, demand continues to wane. At the pump, U.S. retail gasoline demand historically weakens to the lowest levels of the year in January and February. And you've definitely noticed. The national average for regular unleaded may be up from its December lows, but still $1.79 a gallon is a far cry from $4.11 a gallon reached just 6 months ago. The dramatic rise in unemployment is set to only exacerbate the demand decline, not only in retail demand but in power demand. In an economy such as this, people inevitably drive less, spend less and use less -- and companies do too. This also means less power generation and industrial demand.
This also means lower prices for natural gas too.
Goldman Sachs [GS
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] says the supply & demand surplus is likely to drive inventories higher and put pressure on its forecast for $30 oil in the first quarter of 2009. Yes, this is the same bull that called for oil prices to hit $200 a barrel last year.
But beware: the target may have been off on the way up, but it doesn't mean it'll be wrong on the way down. It looks as if we're in for another dramatic year.
Data is a real-time snapshot *Data is delayed at least 15 minutes