Gustav Misses: Oil Prices Go Bearish Again

I guess that quick oil price spike was easily dispelled since Gustav wasn't the "mother of all storms" as guys like Mayor Nagin feared.

Another analyst also said now that the market perceives that the storm passed without great disruption, it has very quickly returned its focus on slumping global demand. "You look at the overall fundamentals," of the oil market, "and they are bearish really," said Andrew Lebow, an energy analyst at MF Global. "Gustav was just a stopping point - a brake for the time being," until prices continue their long slide.

I agree with this assesment because European economies are just starting to show negative growth and should be cutting back on oil demand in general.  So only the Chinese and the Indians could actually drive up oil demand.  It seems the Chinese are starting to feel a little demand destruction of their own.  

Some closest to the pump say the day has already arrived, nearly two months after Beijing surprised the nation with a near-18 per cent rise in subsidised gasoline and diesel prices.

“Demand is definitely coming off after the price hike. Among the worst hit is the transportation sector, which had been operating on razor-thin margins even before the increase,” said Qi Fang, a long-time independent dealer who owns a dozen petrol stations in Hebei province, near Beijing.

“Americans were screaming at $4 per gallon petrol and they are using less now. Chinese petrol is only less than 20 per cent lower, how can we sustain these kind of prices?”, said Qi, adding that his firm’s sales since July have dropped over half versus a year ago.

So we may not see another repeat of that massive crude buildup that the Chinese did prior to the Olympics at least for the rest of this year. We may even see their economy start to sputter as the US cuts back on spending for Chinese exports.  A slower Chinese economy will slow oil demand right there.

So as I see it only OPEC would be able to prop up oil prices going forward.  It seems that they may actually cut production on September 9th in order to keep prices high.  If that move doesn't cause crude prices to spike or oil stays flat then you could say that froth has been driven out of the markets.  Then we can finally see the supply and demand dynamics of oil go back to normal again.