Schork Oil Outlook: Caveat Emptor

ENERGY PRICES WERE MIXED LAST WEEK… natural gas meandered in the mid $3s, again, while crude oil moved ever so closer towards the $70s. Last Tuesday and Wednesday NYMEX WTI crashed by more than $5 a barrel. Then on Thursday and Friday, without a headline mind you, the market bounced back by more than $6. Thus, at this point, it is certainly hard to argue against a $75 print.

Amongst all the Pollyannaish tag lines in the first half of this year, none was more blindly adopted than the second derivative. Hands down, this was the media darling, if for no other reason than it pertains to differential calculus (the study of the rate of change). A derivative of a function is a function that describes the rate at which a (dependent) variable changes with respect to the rate at which the (independent) variable changes. Furthermore, the second derivative or the derivative of the derivative describes the rate of change of the rate of change.

The economy was still sinking in the second quarter, but the velocity of demand destruction was slowing.

Bulls wanted us to believe that less bad economic headlines, while still bad, were good in terms of higher order derivatives, hence why the market cheered when it was reported only 345,000 Americans lost their jobs in May or, as we just learned on Friday with “advanced” estimates from the Bureau of Economic Analysis (BEA), the U.S. economy contracted by only 1.0 percent in the second quarter.

In this vein, the bulls where making a farfetched assumption that perceived less bad headlines implied the economy was nearing an extreme value or inflection point and that was good, i.e. the rate of change of the curve along the x axis was decreasing.

However, in the real world, with so many conflicting variables in play, plotting out the future path of the economy is a tad more complicated than looking at a line along the x axis of a Cartesian graph. Anyway, even when you parse the pseudo-mathematical jargon of the bulls, the slope of our line, i.e. the economy in the second quarter was still concave downward, albeit with a lessening degree of velocity. If you think that is good… good for you, we do not.

To wit, talk of second derivatives, green shoots, etc... aside, the latest numbers from the BEA show that the contraction in the U.S. economy was a lot worse than what was initially touted.

Bottom line, we are in the worst economic slump since the Great Depression.

Caveat emptor… acceleration to the downward slope of the economy is lessening, but it is still negative. Be that as it may, here at The Schork Report we will not argue that the slope of the curve is approaching zero, i.e. the recession is bottoming.

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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.