Wednesday, July 30, 2008

Oil Inventory numbers and Crude Prices

I can't help but think that most often, the market totally misreads the situation when they get new inventory numbers. When inventories are down that means the price should go up right? Not necessarily.

Market sentiment is the key factor. Just think of how you would behave if you were a purchaser/end user of the product. In a stable price environment, your going to buy what you need. In that case an unexpected rise or fall in inventory would signal an increase or decrease in consumption that's larger than anticipated. That's what happened a couple of weeks ago. The sentiment was that oil was near a short-term high, so you wouldn't expect big increases in inventory. Yet inventories increased, which means buyers overestimated demand. The price came down. Sentiment changed. There were more short positions than long in the futures market for oil. One would expect inventories to decrease. Why stock up today if you believe the price will be lower tomorrow. Today's numbers showed a drop in inventories. The market read this as an increase in demand and oil is up big.

I suspect reality will set in over the next couple of days and oil will be down around $120 or lower by close of business Friday.

No comments: