Think about this… we are at the height of seasonal demand. The obligatory nod to China aside, the U.S. drinks 1 in 4 barrels of the world’s oil. The majority of this oil has to be boiled to manufacture gasoline. In other words, demand for crude oil by the world’s largest consumer is at its highest right now. Yet, because demand for gasoline is so poor, refiners are minimizing output (see chart in today’s issue of The Schork Report) right now. Therefore demand for crude oil, right now, is poor… and it will get poorer as we move into the shoulder-months this fall. That is why crude oil is on sale right now.
In this vein, vis-à-vis the contango, supplies of crude oil are set to remain high. Why sell incremental production or current barrels in tank in the near-term when I can sell the forward curve (net of carry) and still collect a profit? If demand prospects were real, you would not be able to do this.
But, we can do this… and we have been able to do this (at varying degrees) since the fourth quarter of 2008. The extant contango is a virtual license to print money. The academics maintain this event should be short lived. The fact the market still has not been able to arb this trade out is a clear sign of how poor demand really is.
That said, our friends, the speculators, still like owning NYMEX crude oil. Per last week’s update from the CFTC, net non-commercial length on the ICE and NYMEX (inclusive of futures, swaps and options) was 2½ times greater than the actual inventory sitting in Cushing (see chart in today’s issue of The Schork Report).
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.