Stephen Schork
Editor of
"The Schork Report"

“Sell in May, go away” was one of the old Wall Street adages that went by the wayside last month. Bad news was ignored… good news, or rather, less bad news, was exaggerated. The FTSE-100 was up 10.7%, the CAC-40 rose 10.4%, the Nikkei managed a 2.4% rise and even the S&P squeezed out a 1.8% return. Rising global equities markets did wonders for consumer confidence in the U.S. That confidence helped to fuel a massive rally in commodities, especially oil.

Last Friday spot NYMEX crude oil finished the week closer to $70 than to $60. As such, OPEC’s, as well as Boone’s prediction of $75 is well within earshot. Heck, if we see a

cooperative DOE report this Wednesday we might see $75 by Friday.

$75 oil on the NYMEX probably translates into around $69 wet (per the relationship between WTI and the EIA’s weighted average of domestic and imported crude oil costs). A $69 acquisition cost at the refinery translates into plus $3 at the pump.

So the question begs… is $3 at the pump, in this economy, sustainable? As illustrated in today’s issue of The Schork Report, the answer appears to be no. Per the Federal Highway Administration (FHWA), a long-dated upward trend in vehicle miles traveled (VMT), was snapped in December 2007. The upward slope in VMT began to plateau in the fall of 2005, i.e. in the wake of hurricanes Katrina/Rita when nominal prices at the pump first peaked above $3.

VMT then flat-lined from the fall of 2005 through the fall of 2007; a time when retail gasoline averaged $2.71 at the pump. Demand turned south after that point. What is interesting, demand decoupled from the long-dated trend at a time of relative economic prosperity. The U.S. economy grew on average by 2.6% per quarter, 149,000 jobs were being added each month and consumer confidence was at/near post 9/11 highs, ≈105.

Furthermore, China (the bull’s go-to excuse) was growing by leaps-and-bounds, 11.3% per quarter. In other words, demand was stout. Today, consumption is a few degrees (if by degree you mean light year) from stout. The U.S. economy has contracted in four of the last six quarters and it’s a hotly disputed debate amongst the cognoscenti as whether we will see any growth this year. As far as jobs go, unemployment in Europe and the U.S. is high and rising. Even the White House’s economic team does not expect a turnaround on this front until 2010. U.S. factories and mills are running at about two thirds of capacity.

But stuff like global GDP, employment, industrial production… that’s so first quarter. Therefore, we can ignore it and focus on those green shoots, right? After all, all of those “stimulus” dollars Uncle Sam is busy printing have yet to be injected. That said, we will not argue against crocuses, mustard seeds or whatever fashionable euphemism you might want to employ that allows you to forget the current doldrums. Signs are appearing that we have entered a bottoming phase. Fair enough. Seeing the length of this bottom phase… “V-shape”, “U-shape” or even “L-shape” is a little trickier.

Of course the economy is going to turnaround. Whether it occurs by the end of this year, beginning of next year or two years from now is anyone’s guess. However, we will argue that energy has overshot the current bottoming phase, because we all know that demand is not turning around in the spot market, which is where consumption commodities are priced.

After all, when the global economy was strong and gasoline in the U.S. averaged $2.71, demand still stalled. Today, we are all flat on our back, struggling to pull ourselves off of the canvas. Yet on Friday NYMEX gasoline settled at $1.931 which loosely correlates to $2.68 at the pump. Here at The Schork Report, we think that is dear. But, given this market’s momentum, we will wait for the wreck before we dare step in front of this train.

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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.