CNBC Guest Blog

Published: Thursday, 25 Jun 2009 | 10:48 AM ET

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Stephen Schork
Editor of
"The Schork Report"

Demand for petroleum products in the aggregate is flatlining.

The net amount of products supplied to the market fell below 18 MMbbl/d for the second time in the last four reports and therefore, for only the second time since the week following 9/11 (see Chart of the Day in today’s issue of The Schork Report). Thus, apropos yesterday’s conversation re: the latest numbers from the Federal Highway Administration, incipient consumer demand in April was undoubtedly thwarted with the extant run-up in crude oil and gasoline values since then.

As we noted in our June 04th report, in the midst of a late season purge in gasoline supplies we had cause to be cautiously optimistic. Capacity utilization, while low, was at least trending in the right direction. Furthermore, the ratio between crude oil supplies and gasoline was seasonally high at 1.8. Thus, refiners had surplus crude oil to burn and the capacity to burn it… unscheduled outages aside.

Since then we have seen a poor response from consumers at the pump, but a positive response from refinery activity. As such, gasoline supplies are near seasonal norms and the ratio to crude oil it still relatively high, 1.69. Hence, yesterday’s inversion in the extant summer gasoline NYMEX strip. Five weeks ago this three-month strip was in a rather steep backwardation, e.g. July gasoline was marked at 1.7% premium to August gasoline. The message was clear, i.e. the week before the U.S. Memorial Day holiday – the start of the summer driving season – gasoline stocks were falling and throughput and capacity utilization was weak. Therefore, the market was charging a premium for nearby supplies.

Since then gasoline supplies have increased by a net 4.95 MMbbls or 2.4% and demand has lagged. Thus, as we look ahead to the U.S. 04th of July holiday, supply concerns have… i.e. despite technical strength in crude oil, futures traders on the NYMEX are now discounting (contango) nearby supplies.

Thus, we remain cautiously optimistic this market has (finally) entered a topping phase… volatility and the direction in the U.S. dollar notwithstanding.

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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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