Oil prices have rebounded slightly today after recent steep losses. Yesterday, the latest weekly report from the Energy Information Administration (EIA) showed that gasoline demand over the four weeks ending July 18th was 2.4% lower than a year ago. This data offered further evidence that Americans are cutting back on fuel because of high prices, which drove down the price of oil nearly $4.
The economic slowdown and the demand destruction that is occurring in the US, the world’s biggest energy consumer, has driven the price of oil down over $20 from its peak in recent weeks. Other factors have exacerbated the decline. A stronger US dollar has also helped drive down oil prices. The US dollar has been in an uptrend ever since the US government announced its plan to help mortgage giants Fannie Mae and Freddie Mac.
Questions remain whether this decline in oil will continue. In the past four-plus years of oil’s bull run, the market has experienced similar sharp corrections only to see oil rebound and move to new highs. From a technical view, chartists are looking at support levels around the 120 level and then again at the 110 level.
Some fundamentals point to continued strength for oil relative to external events, such as the unrest in Nigeria. Nigeria produces the Bonny light crude that US refineries want. This area of the globe continues to be very important to the oil market. In 2007, Nigeria and Angola combined exported more oil to the US than Saudi Arabia.
On the demand side, recent cuts in fuel subsidies in many emerging markets have fueled optimism that demand will slow down in those markets. However, so far the cuts in fuel subsidies in China has led to higher demand for oil. Refiners in China were not refining oil into diesel and gasoline because of the huge losses they would incur selling these refined products at low prices. Now the higher prices for refined products have encouraged them to again begin refining oil and producing diesel and gasoline.
The many cross-currents in the oil market continue to swirl. The question for the oil market is whether the decreased demand in the United States is enough to keep oil prices moving lower.
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