The U.S. equity market found and Oil seems to have lost their respective “footing” in today’s trading. Seems oil traders are beginning to believe news reports of declining oil/gasoline demand due to higher prices. Thank goodness you have me, assisted by my trusty calculator, to cut through the propaganda. And speaking of propaganda, this was on Bloomberg News today:

“U.S. motorists cut back on gasoline purchases during last week's Thanksgiving holiday as prices stayed above $3 a gallon, a report from MasterCard Inc. showed.

Consumers purchased an average 9.32 million barrels of gasoline a day in the week ended Nov. 23, down 1.7 percent from the same week last year, MasterCard, the second-biggest credit- card company, said in its weekly SpendingPulse report. It was the fifth consecutive week that demand at the pump dropped compared with a year earlier.” Bloomberg News, November 26, 2007

Now that’s really interesting because according to EIA data:

(you can read the table yourself here: http://tonto.eia.doe.gov/dnav/pet/hist/rbob-nyhW.htm)

Wholesale prices for RBOB Gasoline finished the week ended 11/16/07 at $239.150, and;

Wholesale prices for RBOB Gasoline finished the week ended 11/17/06 at $156.036

A price increase of 53.26% yielded a demand decline of 1.7%? Or did a SUPPLY decline of 1.7% require a 53.26% increase in price in order to bring supply and demand into equilibrium?

And that begs another question: Did the price increase really bring supply/demand equilibrium, or was the rise in prices cushioned by drawing down inventories?

Hmmm… The plot thickens… So let’s go to the video tape! (or to the EIA data base, as it were)

RBOB Gasoline inventories as reported by the EIA, week ended 11/17/06: 42,747,000 barrels

RBOB Gasoline inventories for week ended 11/16/07: 40,446,000

The plot gets thicker… let’s have a look at finished gasoline products (not just RBOB)

EIA total gasoline inventory week ended 11/17/06: 110,431,000
EIA total gasoline inventory week ended 11/16/07 104,516,000

The plot is as thick as frozen molasses at this point. Let me sum up the disparate data:

1. Wholesale gasoline prices increased 53.26% year over year
2. “Demand” fell 1.7%, according to Bloomberg
3. Inventories declined 5.35%
4. Retail gasoline prices increased 38% (per Bloomberg)

Forget for a moment the different percentage increase in price for retail and wholesale, as these are different markets. Let us just use the 38% increase in retail prices. Now perhaps you think that crude or other finished products increased by the amount gasoline inventories declined (plus the 1.7% decrease in “demand”). Nope. Crude oil inventories for the same week over week period were down approximately 8%, distillates were down 3%.

Inventories went down in all categories, gasoline consumption for the entire year is down, as is the week over week 11/17/06 and 11/16/07.

Now I know I have a lot of moving parts here, but it seems a reasonable hypothesis to say that supply fell, prices increased enough to bring demand into equilibrium with supply, but not nearly enough when inventories are taken into account. Since inventories have been in steep decline, and since it is impossible to draw inventories down past ZERO, either inventories begin to build, right away; or the price will begin to rise significantly; or inventories and prices can remain in equilibrium right here, but only if supplies increase by the amount of the inventory draw of the past several months; or the WORLD economy, particularly China, India, and the Middle East, must contract enough to ease the pressure on oil demand. (My readers will remember the “chicken or the egg” problem I outlined in an earlier post)

One of the above moving parts has to give. If you can arrive at the correct outcome, and have capital, and the courage of your own convictions... the opportunity is overwhelming. Or you can turn on the tube and catch another exciting episode of “desperate housewives”.

I have made my bets, and I hate TV. Consequently, I find myself in front of this computer trying to make sense of all of this. At this moment, all of the data taken together support a peak in Oil supply for the U.S. as past tense, and perhaps for the world as well.

Yours for a better (post fossil fuel) world,

Mentatt (at) yahoo (d0T0 com