Stephen Schork
Editor of
"The Schork Report"

ENERGY PRICES WERE WEAK ON WEDNESDAY… the bottom fell out from underneath the entire complex, again. As such, the bulls in the liquids markets are now down to their last line of defense… the 50/62% retracements (ratio scale). Failure to hold the line here could signal that the real correction is about to kick into gear.

Given extant demand destruction (see last week’s payroll data as the latest in a long list of examples) the current supply of gasoline is sufficient to see the market through to the end of the driving season in early September.

In the middle section of the crude oil barrel supplies of distillate fuels just continue to build and build and build and… supplies last Friday stood at the highest level since the week before Reagan’s second inaugural address (January 21st, 1985). Similar to the situation for gasoline, the lack of demand for on-highway diesel (imports et al.) and off-highway diesel (construction et al.) the current overhang in supply will continue to add ballast to the bull’s ship.

At the same time, crude oil stocks continue to fall. Over the last nine reports supplies have dropped by 28 MMbbls or 7½%. However, as we noted yesterday, there is no reason to think this purge will not continue. In other words, slack capacity utilization is being offset by low domestic production and imports.

Nevertheless, the futures market is showing little regard for this probable drawdown in crude oil (see Chart of the Day in today’s issue of The Schork Report). For instance, last night in the wake of that “large” drawdown in crude oil supplies, the contango (the premium afforded the deferred contracts) settled at one of the steepest inclines in two months. In other words, despite ongoing efforts to reduce supply, traders on the NYMEX discounted spot material at a two-month high. Therefore there is very little concern regarding the nearby availability of supply.

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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.