From a low in the $30's just a few months ago, oil has now surged back above $68 a barrel. Most of this double has been in response to the falling US dollar; certainly not a renewed wave of world consumption.

Recently we hear rumblings of the familiar old "decoupling" chant. Oil Bulls are opining that recent price strength is spurred by rebounding commodity demand in Chindia notwithstanding the ongoing plummet in western consumption. So far the evidence is unconvincing.

There has undoubtedly been some stockpiling by the Far East as export economies seek to add to reserves in anticipation of future demand and future inventory needs. No doubt they have also wanted to stash some cash in assets other than just US Tbills. But now that inventories are over-stocked and demand is still slack and falling in the western world, the question becomes how much longer oil prices can defy the laws of real market equilibrium.

An article in the WSJ today looks at the reality:

"China's appetite for commodities is well established, but the card looks overplayed in this instance. China is big, but not that big. In the first quarter, it accounted for 9% of global oil demand, compared with 55% for the largely recessionary industrialized world.

As for iron ore, Chinese consumption is growing strongly, but its market share is flattered by collapsing demand elsewhere. Iron ore prices have fallen.

Most of the recent surge in apparent consumption also reflects Beijing's stimulus efforts and likely stockpiling of resources at cheaper prices. Sanford Bernstein estimates filling the first phase of China's new strategic petroleum reserve may have boosted imports by up to 400,000 barrels a day in March and April. The likelihood is that inventories will be worked off and apparent consumption growth will wane in the coming months.

The elusive ingredient, with both short- and long-term implications, is much higher domestic consumption in China. Stimulus dollars helped push up fixed asset investment by almost one-third in the first quarter, but consumer spending grew by less than 10%."

See the whole article at Slippery Perch for Oil: