Oil inventories released this morning continued to show a lack of demand for relatively low priced oil. The latest build of approximately 370 million barrels is the largest we have seen since 1990. This latest rally does not seemed to be confirmed by a change in the demand for raw goods. The chart below shows the advances and declines of crude oil inventories over the past 20 years. You will see during periods of strong demand such as 2001 – 2004 oil inventories declined where as during periods of slowing demand and increased supply inventories declined.
It is possible that we have not yet seen the worst of this current recessionary period. One would think that an increase in the demand for raw goods such as oil, metals, timber and other commodities would signal a sustainable rally for equities. In the past few weeks however, the exact opposite has been happening. In the chart below you will see an overlay of the price of the Dow Jones AIG Commodity Index (White Line) and the S&P 500 (Orange Line). You will notice that over the past 6 weeks the S&P 500 has risen dramatically while the DJ AIG Commodity Index has stayed relatively flat to negative.