Supply/Demand – What's happening to traditional economic logic?
If economic fundamentals (supply/demand) determine prices, then with the current supply situation, why are crude oil prices at current rates? OECD countries' commercial oil stockpiles are at record levels and in fact the last time these stockpiles were in this range (1998) crude prices were $12 a barrel. One major difference is that the world's consumption of oil has risen dramatically. In 1998 world oil consumption was estimated at 74.053 million barrels a day (b/d). Today, consumption is estimated at 10 million b/d more or approx 85.950 million b/d. However, OECD countries' oil consumption today is estimated to be some 1.5 million b/d less than 1998. How can this be?

China has significantly altered the dynamics of world oil supply and demand. Prior to 1998 China's commercial and strategic stock inventory represented 60 days of import cover. Today, China's two largest oil companies, China National Petroleum Corporation & Sinopec, could meet demand for only about two weeks. Despite the slow economic recovery in the OECD countries, China's recent industrial success is based on domestic industrial demand rather than external trade, especially car manufacturing.

Therefore even though North American supply is at record levels, the supply side of the world oil market has passed the price determinant torch over to the demand side lead by demand growth in China, a country deepening in its dependence on oil.

Financial and Speculation:
Commodity markets continue to find buyers for ever increasing oil price contracts. Oil inventories are at high levels with surplus production capacity. This should indicate a bearish market condition for investors leading to money outflow from petroleum commodities and reducing prices. However, if the investment opportunities elsewhere are worse, such as in the currency market, then investment money will flow to where the best opportunity for gains exist. This appears to be what's happening in the petroleum commodities market, presumably coupled with the economic signals from China.

Demand:
U.S. retail gasoline sales dropped 0.24% from last week, Mastercard reported on Tuesday.  The year over year moving average for the week ended January 7 dropped 0.9%.

• US retailers reported the best holiday sales season in 3 years with year over year sales rising 3.4% in December. However, Wall Street analysts urge caution that shoppers may put their wallets away after Christmas noting that December sales may not be an indicator of US economic recovery.
• US unemployment rate fell 0.4% to 9.4% in December 2010 with overall non-farm payroll employment increasing by 103,000 jobs in December. Employment rose in leisure, hospitality and health care fields with little change in other major industries. However, unemployment claims have increased in the period ending Jan 8, tampering the initial positive news of the unemployment rate drop.

• The recent troubles for the Trans Alaska pipeline may be a sign of the future for this pipeline. As Alaska oil production dwindles, the pipeline must run at less than full capacity which lends itself to structural breaks as recently has been seen.
• Despite the economic troubles from some European countries, very positive economic signals are coming from Germany. Germany is Europe's biggest economy and has seen economic growth in 2010 at 3.6%, its biggest in two decades. Germany is the world's second biggest exporter next to China.