Yesterday morning's stockpile report painted a grim picture and let us know that it's not traditional fundamentals driving prices higher these days.

Gasoline demand last week averaged just 8.95 million barrels per day, a far cry from last summer when demand was over 9.3 million barrels per day. Although some may think the success of the CARS program may be behind this, I highly doubt it. (I've done the math and found a maximum impact on demand to be less than half of one percent). Either way, lower demand is good news for consumers because it typically means lower prices.

Distillate demand (diesel and heating oil) dropped closer to three million barrels per day- much lower than last summer when it typically was over four million barrels per day. This is alarming because it signifies a large slow down in industrial usage. Overall, demand of oil products in the U.S. has dropped from ~19.5 million barrels per day to nearly 18 million barrels per day, almost a ten percent drop.

So why hasn't oil traded lower? If demand is down and there aren't so many active factors (such as geopolitical issues, tropical storms, etc) what's to happen? Summer is approaching an end, and with it, the end to more expensive summer blends of gasoline. Once we're out of driving season after Labor Day, prices will fall. It can't get here fast enough.

There is a larger risk in trading oil right now in my mind- odds are growing that the recent run up in prices is overdone and that we'll see a correction in oil prices. Let's face it- good economic news just can't topple the fact that there is so much spare capacity. OPEC has plenty of room to pump more, U.S. refiners have plenty of room to refine more, stockpiles are high, demand is low... it's time to get back to fundamentals and stop trading on a whim. Perhaps it's time to change trading laws to prevent making a quick buck off oil consumers.

Patrick DeHaan
Senior Petroleum Analyst
GasBuddy.com