Stephen Schork
Editor of
"The Schork Report"

ENERGY PRICES WERE WEAK ON TUESDAY… the entire complex moved lower as some more bad headlines (as opposed to those less bad [sic] headlines) weighed on the bull’s ability to hype the market. For this morning’s DOE report the crowd is expecting a net build of 0.5 MMbbls in the major products and a 1.5 MMbbl draw in crude oil.

Last Wednesday the U.S. government reported that net commercial crude oil stocks fell by 1.8 MMbbls or 0.8% to 342.7 MMbbls. It was the tenth draw in the last eleven reports. Regardless, the surplus to a year ago and to the 2003-07 timestep were each essentially unchanged, 16% and 8.3% respectively. All told, total crude oil inventories (commercial + SPR) in the U.S. as of Friday, July 17th decreased by 0.2% to 1.067 billion (×109) barrels.

The extant drawdown in crude oil notwithstanding, supplies are adequate given that demand is so poor.

Furthermore, the U.S. Federal Highway Administration (FHWA) recently reported that demand for gasoline in May (as gauged by vehicle miles traveled or VMT) increased by 0.07% compared with a year ago.

Gasoline at the pump averaged around $2.367 a gallon in May, down 40% or $1.458 from May 2008. Yet, this discount was only good for a de minimis 7 bp increase in demand. As we noted in last week’s issues of The Schork Report, despite lower prices, consumers are still choosing to drive less. Bottom line, last week’s report was bearish, crude oil supplies fell, but the mechanics in this market have all the semblance of an end-of-season clearance sale. More importantly, transportation fuels (gasoline, net diesel and aviation-kero) all increased.

If you cannot drawdown these fuels at the height of summer then when can you?

In light of yesterday’s consumer confidence report from The Conference Board, the answer to this question is… not very soon. To wit, the outlook amongst U.S. consumers took a second straight downturn in July as retail gasoline surged 10%.

While initial unemployment insurance claims have been trending lower over the last few weeks – a truly green shoot – the overall picture is still bleak with the likelihood that the true unemployment rate tops out well above 10% by the start of next year.

However, bullish speculators have once again seized control of the oil markets… on the perverted logic that high energy costs pulls economic demand higher rather than the intuitive notion that economic demand pushes energy costs higher. Thus, with energy costs remaining sticky at relatively higher values, not to mention the earnings potential for Big Oil, here at The Schork Report we remain suspect of demand.

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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.