The oil bears have the hammer

There was a time in the oil sector when futures traders and others involved in oil plays could initiate successful oil buys practically at will, and almost like clockwork.

How much is oil rising today? Two dollars per barrel? Three? Oh, look, there's word of more civil unrest in Nigeria -- and bingo, oil shoots up $5.

Well, those days are 'long' gone (pun intended!) and today the oil bears have the hammer. Oil bulls put on trades sparingly, and with trepidation: any word of slowing retail sales or rising U.S. jobless claims can send oil plunging, frequently wiping out minor, intra-day oil rallies, and with it the oil bulls' profits.

Pyrrhic rallies

True, oil has popped back above $40 per barrel, rising $1.48 to $41.04 early Tuesday, but how long will the $40 mark hold?

Not long, so says energy trader Jim Dietz, if oil inventories mean anything. "Most rises these days are tied to externalities, like the dollar, not to demand," Dietz says. "We'll get a little rise on the belief the fiscal stimulus package and deficit spending will cause the dollar to fall, but those oil rallies don't last. And they can't last because the oil demand isn't there." Oil hit an all-time high of $147.27 per barrel in the summer of 2008.

About that demand, Dietz says U.S. oil and gasoline consumption is likely to continue to decline, as long as the U.S. economy continues to shed jobs at an alarming rate. During the recession, the United States has lost more than 3.5 million jobs -- an enormous total in oil consumption terms, according to Dietz -- including a staggering 1.5 million in the last three months alone.

"You take three million or 3.5 million people out of their cars and off the road, and I think you can see what happens to gasoline consumption. Ask any convenience store owner in Florida or Southern California. They'll tell you what it means," Dietz said.

Oil Analysis: For investors, if you're considering an integrated oil stock or a related oil play, forewarned is forearmed: even with a declining dollar, a pronounced recession in the U.S. and flat oil demand in emerging markets is likely to keep oil struggling to stay above $40 and another plunge toward $30 is likely. For the bearish oil sentiment to reverse, the U.S. economy must show signs of a recovery.
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