Oil Prices Are Mortal but $4 Gas Still Not Vulnerable
NEW YORK ( TheStreet) -- When the Big Three Detroit automakers reported monthly sales earlier this week, there were two interesting footnotes related to this country's so-called addiction to oil. First, sales of General Motors (GM) trucks were a standout, and one of the drivers has been the domestic oil and gas drilling boom.
"Domestic oil and gas activity is fueling truck sales," said a GM official on a conference call with Wall Street analysts.
At the same time, the Big Three are selling more fuel-efficient cars and as gas prices hover near $4 nationally, the plug-in hybrid Chevy Volt just had its best sales month on record.
|A big build of crude inventory in the U.S. does not mean we are driving less; $4 gas is still going to be reality.|
Yet this week there was a huge build in U.S. crude oil inventory -- to 9 million barrels versus an estimate of 2.5 million barrels. It's the kind of crude build headline that should lead to a knee-jerk bearish reaction from the market, according to Summit Energy commodities analyst Matt Smith. The reaction was just that, but it's far from clear that the reaction will be lasting.
The news from the Big Three suggests that weakness in oil prices doesn't mean gasoline will be getting any cheaper, or that the reality of the oil market has changed as consumers look for less expensive tanks to fill up and U.S. drillers search for ever more domestic sources of black gold; demand is still high and supply still tight. Market traders, too, are waiting for the right moment to buy oil before it heads higher.
"Even though people are buying more fuel efficient cars, in real numbers, people are driving more and buying more cars," said Carl Larry, president of Oil Outlooks and Opinions.
It was likely the timing of the latest crude inventory data that mattered most, coming on the same day the Federal Reserve's "no new quantitative easing" lip reading made for a stronger dollar and Spanish debt yields spiked, reminding investors that the global economy has no shortage of pressure points even as central banks get stricter with loose money policy.
"Crude oil inventory is going up, but gasoline inventory is still going down, and that's the important thing for the American consumer," Larry said. "We need to focus not on how much crude we have but how much refined product we can make and gasoline is not going to get cheaper."
In fact, Larry said that the inventory build is a story about how much more gasoline the U.S. is producing, more so than a headline of demand destruction throughout the system caused by high gas prices.
The Energy Information Administration revised domestic production numbers significantly higher this week, and as many as 6 million of the 9 million barrel build in crude can be explained as a function of greater domestic production and expectations going forward, Larry said. A 3-million barrel build would be slightly high, still, but much closer to the market expectation of 2.5 million barrels in inventory.