Stephen Schork
Editor of
"The Schork Report"

Energy prices were mixed on Wednesday. Natural gas futures in New York corrected following Tuesday’s peculiar rally, while the liquids complex rallied out of a key technical area of support. Thus, bulls rose to the occasion in the oil markets. Now the question holds… can the bears return the favor?

We are now entrenched in the peak U.S. driving season.  As we outlined in yesterday’s issue of The Schork Report, consumer demand, as measured by the retail sales figures, continues to lag. To wit, over the previous four DOE reports the amount of gasoline supplied to the market averaged 9.14 MMbbl/d.  That is 2.2% below a year ago… despite the fact retail gasoline prices were 36% or $1.482 a gallon cheaper this year.

Meantime, yesterday’s industrial production report from the Fed indicates that the U.S. factory economy is still flagging. Manufacturing output fell 0.6% in June after

having dropped 1.1 percent in May. For a sixth straight month the factory operating rate declined to a historical low; from 67.1% in January to 64.6% last month. Prior to this recession, the low for this series, which begins in 1948, was 68.6 percent in

December 1982. For the second quarter as a whole, manufacturing output fell at an annual rate of 10.5%.  However, that decline was about one-half the rate of the decrease recorded in the first quarter… so get ready for it… less bad is good.

Regardless of the degree of badness in yesterday’s report, one thing is clear, those alleged green shoots are withering.  As we see in the Chart of the Day in today’s issue of The Schork Report, capacity utilization in Manufacturing bottoms at the end of the recession. In other words, even though manufacturing’s share of the U.S. economy has been steadily shrinking since World War II, we have yet to come out of a recession without a rebound in this sector.

In this vein, yesterday’s reported decline in utilization was expected. As we noted in our June 17^th report, given the extant retrenchment in the metal-bending states, industrial and capacity figures will likely not improve in the month’s ahead.

For example, automobile and light duty motor vehicle manufacturing, 37.99%, was 6½ points below May and 55% below a year ago.  In other words, if the U.S. recession is about to end, as the Fed hinted at yesterday (see below) it will likely be doing so without the manufacturers… and that has never happened before.

Bottom line, even if the recession has ended or is about to end, that does not mean demand is about to resume. It just means demand has stopped falling.

We can also see in the Chart of the Day in today’s issue of The Schork Report that manufacturing leads fuel costs. As the factory economy improves, fuel costs follow… albeit with a lag. However, this year traders are tripping over themselves to trump the market. Instead of waiting to see real economic demand pull up fuel costs, we are pushing up fuel costs on the hope economic demand follows. In other words, the bulls have it ass-backwards.

However, yesterday NYMEX crude oil rallied (along with a thinly traded stock market) and closed back above the 50% retracement, 61.25.

Thus, if you are bearish, as we are, then you should be concerned, we are. Regardless of the fundamentals, the technicians are in the process of stemming the weakness and setting the table for another attempt at $75.

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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.