Oil is Broken

We wanted to highlight a point from our morning call today, Oil is broken from both a trade and trend perspective.  As we highlight below, the next big line of resistance in the sand is the $73 level.  From a fundamental perspective, the action in Oil in the year to date is supportive of two of our Q1 Themes, Buck Breakout and Chinese Ox in a Box.

As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars.  In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%.  While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating.  One driver of this is likely the slowdown occurring sequentially in China.

As we wrote in our September 2009 Black Book on Oil, Chinese demand for oil, and demand for oil in China is a derivative of economic growth in China, is the single largest global driver for demand.  As we wrote then:

“China has been the primary driver of global oil demand over the past fifteen years. In 1994, the Chinese used roughly 3 million barrels of oil per day and fifteen years later the country uses north of 8 million barrels of oil per day.

This dramatic growth in aggregate oil consumption should be no surprise given the base from which the Chinese started. At a population base that was estimated at ~1.3 billion in 2008 versus the United States at ~304 million, the potential growth in per capita energy demand is fairly obvious. China has more than 4x the population of the United States, but uses less than half the energy of the United States.”

The decline in the price of oil is a leading indicator for what we will see in terms of economic growth from China in the coming quarter.

Domestically, supply of crude oil continues to be above its 5-year trend.  According to the DOE’s report last week, there are currently 23.8 days of supply of oil, which is ~3% above where supply was last year at this time.  If we compare price year-over-year from the release of this supply data point, so January 20th of this year versus January 20th of last year, the price of oil is up more than 100% . . .despite increasing inventories.

Until further notice, the price of Oil is broken.

Daryl Jones

Managing Director

Oil is Broken - oildj