Back in March I said that a good bit of the price in oil was being driven by speculation. If you are an oil trader with a long book, the last two days have been brutal. It is dawning on folks that this could be a worldwide recession. Yesterday the largest Spanish construction company went bankrupt. Today the Wall Street Journal says that Europe could experience “a hard landing and perhaps recession.” As the Journal reported OPEC says their is a worldwide drop in oil demand.
The group said demand for OPEC crude, which meets about 40% of the world’s daily oil consumption, could decrease by around 700,000 barrels a day next year amid rising output of non-conventional oil and natural gas liquids and rising oil conservation in consuming nations amid high energy prices. A drop in demand for OPEC crude by that amount would be the biggest since 2002, it said.
John Kilduff of MF Global reports that William Burns, Undersecretary of State for Political Affairs, is to meet this weekend with Iran’s nuclear negotiator. Kilduff thinks this is “the most significant US diplomatic contact since the 1979 Iranian revolution and represents a dramatic shift in US foreign policy.” No guarantees, but a successful meeting could go towards reducing the geopolitical risk premium in oil.
My sense is that there are a lot of hedge funds heavily leveraged in oil futures. A $15 drop in three days will force a big reverse in these positions. This growing realization that the recession will be long and brutal is borne out by today’s retail numbers. Despite all of the rebate checks, retail sales were off .5% if you take out oil. What is encouraging from my point of view is that for the first time in two years personal savings rose strongly (to 5%). This means that the consumer is finally getting the message.
The party is over.