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Whoops – Oil Supply Exceeds Demand

01 Oct 2008 12:14TraderF
Its official, the International Energy Agency has confirmed that the supply of oil [NYMEX:CL.C] exceeded demand in the first quarter of 2008.  Production ran at 87.2 million barrels per day (BPD) while consumption was 86.6 million BPD.

Market analysts have been saying for sometime that these price levels are the result of speculative buying by hedge funds and small traders. While it would be a brave analyst to call this the top there are signs that oil will come under some selling pressure in the coming days to weeks.

The reason that it would be brave to start short selling oil is that while supply exceeds demand it does not exceed it by much.  It would only take a 600,000 BPD loss of production to tip the supply to demand balance back to a deficit. As we all know the oil supply is beset with so many factors that upset supply, from political problems in the Middle East to storms in the Gulf of Mexico, the supply would be suddenly cut.

Add to this in recent price action the short sellers have looked weak and lacking in conviction that oil will go lower.  Simply put, while many believe this is the top no one is willing to bet on oil going lower with their own money.  A much more convincing top would be were the price action blasted higher over a very short period on some sort of political news.  This scenario would push prices to unsustainable levels and trigger a collapse.

One of the most fascinating things to watch over the coming months is when oil does drop will the oil company shares fall further and faster than oil itself.  In recent weeks the share prices of all the major oil companies, Exxon Mobile [NYSE:XOM] , Royal Dutch Shell [NYSE:RDS.A] and British Petroleum [NYSE:BP] have been going lower at the same time as oil price itself has been going higher. Once again this highlights that oil share traders are unconvinced that the future earning of oil companies will increase.

With 20 day price volatility running at 47% the risks associated with the oil market remain substantial and to be either long or short looks only for the brave.

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