For the better part of 2014 crude oil has been on a bull run, notching an 8% gain by mid-year. However, a funny thing happened on the way to new highs – near term demand began to disappear. At the end of June the near term WTI crude oil contract traded at a premium to the longer dated contracts, suggesting that the current demand for oil was strong. By the end of July, near term crude oil contracts were trading lower than longer term contracts, even though geo-political tensions were increasing over this period.
The message from the oil market is that it’s not only well supplied, but it’s also lacking demand. Paradoxically, the lack of demand could be a direct result of geo-political tension. The European economy has slowed dramatically and many European companies have blamed Russian sanctions. The bigger picture waning demand story for oil rests on the pillars of improved automotive fuel efficiency and a realignment of the Chinese economy.
With the -2,5% drop in oil today, investors need to start thinking about an economy and stock market that begins to price in lower oil prices. Higher cost oil producers may be vulnerable and even entire countries, like Canada, that rely on oil revenue could see an economic dip. Finally, I would keep a close eye on the rails as much of their earnings have come from transporting black gold.
Follow Brian on Twitter @BrianKellyBK
Disclosure: BK is short Brent Crude Futures. Playas at home can trade Brent Crude thru the ETF BNO