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Schork Oil Outlook: Let’s Hear It for the Speculator

Theories of peak oil notwithstanding, you make prices high enough you will find supply to meet (and eventually drive down) those prices. Don’t believe us? Go ask a natural gas producer.

Therefore, next time you run into one of those evil speculators (see page 1 of today’s issue of The Schork Report) make sure you thank him or her and you better damn well offer to buy them a drink. Because it is them, and not some wonk in Washington sporting a J.D. that will solve the supply side of this equation.

DOE Crude Oil Production
DOE Crude Oil Production

Bottom line, the reported 8.4 MMbbl draw in crude oil from two DOE reports ago has not been found. Therefore, they are gone… and at this point forgotten. That is because overall inventories remain well above seasonal norms as we head into a low demand period through the fall turnarounds. The gasoline season is over and we are up to our eyeballs in heating oil and diesel fuel.

To wit, yesterday’s economic news failed to impress. Per the numbers from the U.S. Census Bureau, the manufacturer’s inventory to sales ratio in July was 1.40. The third quartile from 1992 to 2008 is 1.34. We have no problem with the notion that the economy is in the process of turning around. We just think it is going to be an arduous slog given the precarious state of the consumer.

In this light, gasoline spending as a percentage of overall consumption it back up to 3%. That is far better than a year ago when gasoline accounted for around 4½% of total consumption. But a year ago gasoline consumption was tanking. In fact, a long-term upward trend in miles traveled or VMT (per the Federal Highway Administration) decoupled and plateaued in late 2005, i.e. after shortages related to hurricanes Katrina and Rita forced a sharp spike in price.

The trend in VMT turned negative in late 2007 (the start of the recession) when gasoline consumption (PCE) was around 4.2% of the total and the unemployment rate was 4.7%. Today gasoline PCE is back to pre Katrina levels (see U.S. Employment Rate vs. Consumer Spending Gasoline graph in today’s issue of The Schork Report). That’s a good thing. But the unemployment rate has doubled. That’s a bad thing. In other words, we feel the consumer rubber band or rather retail gasoline prices, in the current economic environment have been stretched about as far as they can go.

On CNBC.com now: Slideshow: Top Ten Gas-Sipping Cars

Thus, crude oil prices cannot go much higher than recent highs without causing untoward pressure to consumer spending in the fourth quarter. Should that happen, then the current glut in distillate supplies go, for both heating oil and diesel fuels, will certainly hold well into 2010, regardless of how cold it gets this winter. After all, without the consumer you will not see a material uptick in the denominator of the aforementioned inventory to shipments ratio. Therefore, whatever nascent demand there is to move inventory from the factory floor space, there is plenty of diesel on hand to move it.

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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.