Crude Oil Finding a Bottom?

UPDATE: OIL FUTURES: Nymex Crude Falls On Huge Stockpile Gain

(Updates prices and tropical storm forecast; adds background on U.S. crude imports)

By Gregory Meyer

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Crude oil futures sank more than $1 Wednesday after government data showed U.S. crude stockpiles swelled by nearly 10 million barrels last week.

Light, sweet crude for September delivery was recently down $1.29, or 1.1%, at $113.24 a barrel on the New York Mercantile Exchange. The September contract expires Wednesday. More active October Nymex crude declined $1.26 to $113.28 a barrel. September Nymex crude was trading at $116.86 before the data release.

October Brent crude on the ICE Futures exchange was down $1.09 to $112.16 a barrel.

The U.S. Department of Energy reported domestic crude stockpiles rose by 9.4 million barrels in the week ended Aug. 15, more than 11 times the gain expected by analysts. It was the largest rise in barrel terms since March 2001 and percentage terms since April 2003.

The gains came after crude imports to the Gulf Coast increased by about 1.8 million barrels a day, to 7.2 million barrels a day. Tim Evans, an energy analyst at Citi Futures Perspective, said Gulf imports bounced back after Tropical Storm Edouard had curbed imports in the prior week.

Today we saw inventory build by almost 10 million barrels, the largest build since March of 2001. At the same time, we hear news that Tropical Storm Eduard is waning. But there is another storm forming on in the Orient: China.

You can see the optimism in the futures. Although we had a huge build in oil inventory, the futures are flat. Has oil halted its slide? Even energy stocks found a bottom last couple days. China will soon go back to full throttle and Oil is going back to $150. Goldman Sachs said so.

Where I find flaw in this China-Olympics theory is that the media makes it out to be that there are only 2 consumers in the world of crude, U.S.A and China. Everyone says that this decrease in demand is thanks to the slow down in China to clean up the air before the Olympics. Did everyone forget that the rest of the world, including emerging markets like Russia, Brazil, and India, have NOT slowed down because of the Olympics? To add, China did not close down production country wide but only in Beijing and a few other small factory and port cities. Beijing is less than 2% (1.7% by my math in 2007) of China's GDP.

While the rest of the world (92% of energy consumption) continues to consume at its pre-Olympic pace, Oil has fallen $35. Yet, CNBC won't stop talking about the impending hurricane of demand that will come from China. I disagree.

As I have already said, most of China is still consuming at its pre-Olympic pace too.

Let's do a little guestimation: China accounts for 8% of world oil consumption (1/3 as much as the U.S). Let's say Beijing consumption has slowed 50% (it didn't) By limiting traffic, it is estimated that daily only 1/3 of the 3.3 million vehicles will stay off the road. Non-discretionary consumption should stay flat. So, 2% of 8% is 0.16% of world consumption, or approximately 138K barrels a day of consumptions. Going back to our 50% decrease in consumption number, Beijing purposely decreased its Beijing consumption by 69K barrels a day. There goes the ramping up thesis. 40 factories here and there don't significantly raise that number in the context of world supply.

My point is that China's actions have not significantly, or even marginally, cut demand. However, in the same time frame, Crude Oil has fallen from $148 to $113. To say that the slowdown in China is because of the Olympics is a canard. Furthermore, China has curtailed gasoline demand by raising prices 17% in late June and OPEC has increased supplies.

The Chinese tried very hard to piece together their country before the world arrived. It is arguable that the super spike we saw in oil was because China tried to complete in months what they should have built in years. Now, I will argue that progress (and consumption) will slow from here. Growth tends to slow post Olympics in host countries.