Investor Hopes for Rising Oil Demand Aren't Borne Out by Reality

By BEN CASSELMAN Crude-oil prices are back on the march, hitting $65 a barrel last week as investors bet that a strengthening economy will soon yield a rebound in oil consumption. But, so far, that looks like wishful thinking. Although rising prices suggest that investors think otherwise, experts' demand forecasts are consistently downbeat, and storage tanks are brimming with oil. Some industry experts worry that investors' bullish sentiment could be self-defeating, driving prices so high that they squelch any nascent rebound in demand -- and possibly apply a brake to economic recovery. Oil prices, which were less than $45 a barrel at the end of February, have jumped more than 45% in the past three months. The rally reflects a range of factors: a weakening dollar, fears of inflation and increased appetite for risk among investors. But the driving force appears to be the first glimmers of economic recovery. Confident that an economic rebound will yield stronger demand for oil, investors are rushing to get ahead of another surge in crude prices. There have been some recent hints of firming demand. U.S. gasoline consumption has risen for two consecutive weeks, according to the Department of Energy's Energy Information Administration. Chinese crude-oil demand rose 3.9% in April over the previous year, according to Reuters. Ali Naimi, Saudi Arabia's oil minister, said last week that an economic recovery was "under way" and predicted oil could hit $75 a barrel by year's end. But other indicators suggest recovery is still a long way off. Americans used less gasoline over the past four weeks than they did in the same period a year ago, even though prices at the pump are $1.50 per gallon cheaper on average. The International Energy Agency last month said global demand is at its weakest level in two decades and predicted that world-wide consumption will fall 3% this year. "If we look around the world, I don't think we see evidence of a pickup in demand," said Rachel Ziemba, an energy analyst for RGE Monitor. She thinks rising Chinese demand may have more to do with the Chinese government stockpiling oil than an increase in energy consumption. Even when demand does rebound, huge stockpiles of oil should ease worries of a sudden supply crunch. U.S. stores of crude are 16.5% higher than a year ago, even though imports are down 6.6%, based on a four-week average. In all developed countries, there was enough oil in storage at the end of March to satisfy 62.4 days of demand, 14.7% more than a year earlier, according to the International Energy Agency. Energy investors appear to be ignoring all the bearish supply and demand data and instead focusing on "green shoots" in the economy, such as an uptick in consumer confidence, a slowing in the pace of job losses, and a quickening of the pace of orders for durable goods. The longer view of many analysts is that oil prices will rise when the healthy economy leads to robust global demand that will outstrip supplies. Oil companies have warned that a prolonged period of low prices during the recession could depress production for years, sowing the seeds of another rapid rise in prices once demand rebounds. But now that prices have bounced back relatively quickly -- oil last hit $65 in November on the way down from a July high of $145.29 -- producers are striking a cautious note. Exxon Mobil Corp. CEO Rex Tillerson last week warned that nobody knows yet whether the green shoots investors are betting on will have roots. "I think it is still too early to call this economy," he said. So far, higher gasoline prices haven't had much impact on American driving habits. Retail gasoline prices rose 18.9% in May, to $2.44 a gallon on average, yet the auto club AAA still predicted a 1.5% increase in Memorial Day driving over last year. That could change if gasoline goes much higher, especially with unemployment and tighter credit already hurting consumer confidence. "Once you begin creeping toward $3 and above, it begins to have that psychological impact and a real impact," said Joseph Stanislaw, an energy adviser for consulting firm Deloitte LLP. If rising energy prices eat into demand, or if the economy withers again, investors could pull money out of oil just as quickly as they have poured it in, said Adam Sieminski, chief energy economist for Deutsche Bank. That would push prices back down and start the cycle anew. Indeed, with fickle investor sentiment, not slower-moving fundamentals, in the driver's seat, it's likely to be a long, volatile summer in the oil markets. —Russell Gold contributed to this article. Write to Ben Casselman at ben.casselman@wsj.com