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Schork Oil Outlook: Hitch Your Wagon To A Bull Market

ENERGY PRICES WERE FIRM ON WEDNESDAY… liquids and gas markets were able to shrug off another bearish weekly government storage report. As such, once again energy traders ignored a stark reminder of the flagging U.S. economy and instead hitched their wagon to a rising stock market.

Overall crude oil supplies surged again last week. In fact, we saw solid builds in all five PADDs. However, despite the surplus here, supplies at the NYMEX hub in Cushing, OK have been trending lower. That is odd given the strong economic incentive to build storage there vis-à-vis the extant sharp contango on the forward curve.

The purge in barrels in Cushing coincides with a preliminary inquiry by that state’s Attorney General’s office into alleged dumping of crude oil by Canadian producers:

OKLAHOMA CITY (AP) Mar 04 - Oklahoma Attorney General Drew Edmondson is investigating concerns that Canadian oil is pouring into the state’s markets, driving down the price Oklahoma oil producers receive for their product. Edmondson’s office confirmed Wednesday he has opened a preliminary inquiry into whether the oil dump is a violation of state and federal antitrust laws.

“Attorney General Edmondson last week met with a group of Oklahoma oilmen to discuss the Canadian oil situation,” said Charlie Price, a spokesman for Edmondson. “The information was given to our antitrust attorney for his review.”

Give us a break. So what is next… New York’s A.G., Andrew Cuomo suing OPEC for supplying too much oil into New York Harbor?

Regardless, there is no reason to think this “oil dump” will not continue. After all, the forward curve for NYMEX WTI continues to show weakness.

WHERE ARE THE GREENIES? In a follow up to last week’s analysis in The Schork Reportof the possible Chapter 11 filing of Pacific Ethanol, the largest marketer and producer on the West Coast, comes news of Aventine’s bankruptcy.

According to last week’s (April 08th) press release from the company:

The ethanol industry currently suffers from poor operating margins as a result of supply exceeding existing demand, including the 2009 renewable fuels standard mandate. Ethanol demand has been negatively affected by low gasoline prices which has all but eliminated the discretionary consumption of ethanol. Ethanol demand has also been negatively affected by refiners and blenders using excess renewable identification numbers (“RINS”) to help meet their renewable fuels standard obligations instead of purchasing actual gallons of ethanol.

Thus, just like Gateway Ethanol, Greater Ohio Ethanol, Beatrice Biodiesel, Bioenergy of America, Ethanex Energy, et al. before it, Aventine (and soon to be Pacific Ethanol?) cannot navigate the volatility in agricultural feedstocks and the attendant squeeze on margins.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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