The U.S.: The Wildcard In Oil's Ascent

Todd Shriber
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Oil prices have encountered some headwinds since moving above $87 a barrel on April 6. That is not altogether surprising given that crude futures have turned in what can only considered a stellar performance (if you happen to be an oil bull) since early February when crude traded below $70 a barrel. So it can be argued that perhaps a little breather was to be expected. Of course, the Goldman Sachs/SEC imbroglio represented an interesting wildcard for oil prices to contend with.

The term ''wildcard'' is certainly an appropriate way of describing how what any investment bank did or did not with opaque financial instruments can have such a profound impact on commodities prices, but the real wildcard in oil's future may be U.S. demand. OPEC said as much as last week when it left its 2010 global demand forecast essentially unchanged. While OPEC, which produces about 40% of the world's oil, said global consumption should increase by about 900,000 barrels per day this year, the cartel called U.S. economic activity the ''wildcard'' in demand growth.

To be sure, oil prices have moved higher in the face of slack demand from the U.S. and other key developed world consumers. Many believe one of the catalysts behind oil prices moving higher is demand from emerging markets. China's net imports of crude almost reached a record level in March. China is now the world's largest automobile market and there are a host of other anecdotes that highlight oil demand in China is unlikely to dwindle anytime soon, so the bottom line is everyone seems to know that China and India need a lot of oil.

But can demand from those countries really make up for lower demand here in the States? The reality is the U.S. is still the world's biggest oil consumer. Apply a sports metaphor to this paradox. Silver and bronze medals are nice, but gold medals are better. When it comes to oil demand, strictly in terms of daily consumption, China, at least for now, is the silver medal, but the U.S. is the gold.

Earlier today, the American Petroleum Institute reported that U.S. oil inventories rose by 741,000 barrels last week while gasoline inventories rose by 1.7 million barrels. The Energy Information Administration delivers its weekly number tomorrow and the expectation is that that report will show a decline of 2.2 million barrels. Last week's EIA number showed a decline as well and it is safe to assume that many oil bulls would like to see more these reports show inventory draw-downs. After all, the U.S. still consumes more oil than any other country.

The reality is oil is much like stocks or other financial securities in that there are multiple components that factor into the prices investors see on a daily basis. Speculators definitely have an impact and can often times trump demand data. Speaking of those speculators, for the first time in quite a while, data from the Commodities Futures Trading Commission is showing that traders are unwinding some of their bullish bets on crude futures. Open interest in puts for oil priced far below where it currently trades is rising.

This is a roundabout way of saying that oil bulls would not complain if they got a helping hand in the form of increased U.S. demand. Is an oil party really a party without the U.S.? Probably not.