Oil Investors Must Contend with Weak Near-Term Demand


"Oil consumption in 2009 will fall to levels last seen in 2005. . ."

The normalization in oil prices has gone far enough. Investors speculating on a peak in long-term supply will have to contend with weak near-term demand. Demand destruction from the credit crunch has set oil demand back by several years. As a result, oil supplies and spare capacity remain very high.

In recent weeks, speculators have bid up oil prices based on normalization in credit conditions and emboldened by the IEA report. Oil producers read the same reports and respond to the same set of data, however. Surely they will restore funding to many sidelined projects now that credit is starting to flow and prices have recovered.

A six-month production delay is hardly a problem given the current state of demand. Oil consumption in 2009 will fall to levels last seen in 2005 when prices were right around current levels. And let's face it; the global economy is an entirely different animal today than it was in 2005.

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