If it isn't bombs in Baghdad, it's kidnappings in the Niger Delta or nukes in Iran. Oil traders thrive on news flow - volatile prices are their bread and butter and the latest scare to excite the price of crude is the threat of hot pursuit by the Turkish army into northern Iraq. The Turkish cabinet is today considering a request to the Turkish parliament for authorisation of a military incursion into Iraqi Kurdistan to attack strongholds of the PKK, Kurdish separatist rebels who have recently stepped up their attacks in Turkey in their eternal quest for independence for Turkish Kurds.The prospect of Turkish military activity in Iraq pushed up the crude oil price by a dollar, breaching $85 per barrel for the first time in early trading of the US Light Crude futures contract, based on some spurious notion that Iraqi oil exports are threatened by Turks.

A military threat from Turkey is a new piece of excitement but it is not the underlying story about oil which is as bearish as it is bullish, depending on which statistic you favour. Oil stocks in the West have been shrinking. Inventories held by OECD countries are down from 54.2 days supply in the second quarter to 53.8 days and the Centre for Global Energy Studies reckons they will fall below 53 days in the final quarter of this year. These sound like small adjustments but in the world of oil futures trading, it is these tiny adjustments in supply and demand which cause violent price swings. More important than a fall or rise in data is the trend and the current trend seems to be destocking, a consequence of Opec's decision to reduce output by almost 1 million barrels per day since the fourth quarter of 2006.

Another, seemingly contrary trend and less noticed by the oil market is the gradual slowdown in the growth of US petrol consumption. Incremental demand growth year on year in motor fuel has slipped from 200,000 barrels per day (bpd) in January 2007 to almost nil or negative figure. By the beginning of October, consumption of gasoline was down 200,000 bpd against the same period in 2006. These figures, like all oil market statistics are volatile but a trend is emerging that should not surprise us. Already bludgeoned by debt and a credit squeeze, Middle America is reacting to high fuel prices and demand is beginning to tail off.

This is what terrifies Opec but instead of stimulating demand, the cartel is behaving like all cartels and doing the wrong thing: it is reining in output in a bid to shore up short-term prices. Meanwhile, the oil futures traders in London and New York focus on squabbles on the Turkish-Iraq border. Let us remind ourselves that northern Iraq exports little oil, the pipeline linking Kirkuk's oilfields to the Turkish port of Ceyhan is more often damaged than functioning and most of the 2 million barrels per day of Iraqi crude is exported from Basra into the Gulf. In the real world, US and Chinese demand for crude is what will move the oil price and on balance the trend looks weaker rather than stronger.

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