CNBC Guest Blog

Published: Thursday, 8 Oct 2009 | 11:08 AM ET

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Stephen Schork
Editor of
"The Schork Report"

Yesterday, with stocks at Cushing now reportedly down to 25.1 MMbbls, the discount between spot and the first nearby contract narrowed to just $0.31 or 0.4% (see chart in today’s issue of The Schork Report ).

Is this a sign of rising demand? Normally, when the carry is priced out of the curve for a consumption commodity market, the inference is such that demand for the underlying good is rising.

But, is this really the case for crude oil… in the midst of turnarounds?

For instance, refinery throughput has been running well within the seasonal norm, 14.75 MMbbl/d over the last four weeks. In fact, if you back out 2005 (Katrina/Rita) and 2008 (Gustav/Ike) then refinery throughput is currently running on the much lower end of the norm for late September/early October.

Stop us if you have heard this one before… it is the refiner, the guy down in Pascagoula and out in Whiting, who denotes demand for crude oil… not the hedge fund manager on Greenwich Avenue or the banker on Stephen Avenue.

So whatever became of those windfall profits from the oil patch anyway? Who is the U.S. Congress going to demagogue (besides “Big Pharma”) now? It seemed so easy just a couple of years ago, i.e. when “Big Oil” was earning billions… but only reaping about (a hardly windfall-esque) 10 cents on the dollar.

Today, some downstream managers would throw their own mother down a flight of stairs for a 10 percent margin. Take Sunoco

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[SUN  Loading...      ()   ] for example; on Tuesday the company announced it was idling, indefinitely, its 145 Mbbl/d Eagle Point refinery near Philadelphia, to reduce losses in its refining business.

Try telling those 400 workers in Philly who have just been furloughed as a result of this idling, that demand for crude oil is strong.

Demand for crude oil is not strong… because demand for the stuff Eagle Point et al. used to turn crude oil into, is still poor. Be that as it may, the NYMEX contango will encourage refiners to liquidate inventory.

The explicit risk today for the bears is this: the market will look upon this liquidation of crude oil stocks as a sign of demand and the market will act accordingly. 

Thus, in the weeks ahead we will want to watch the products stockpiles and the Brent crude oil market. For instance, whereas the NYMEX WTI curve has collapsed since August, the Brent curve in London is essentially unchanged (see chart in today’s issue of The Schork Report ). Given that Brent is a better marker for global demand, that is not a good sign for the bulls.

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What’s more, per yesterday’s report, production of seasonal distillate fuels soared last week, but production of gasoline spiked as well; as of last week production of gasoline jumped to the highest level since the end of the 2008 driving season, 9.42 MMbbl/d.  Thus, what we are currently seeing is a shift in the surplus. Refiners are boiling down crude oil and transferring the glut to the products markets; where the forward curve is more conducive for carrying inventory.

As such, stocks of gasoline and distillates are surging through seasonal norms. If demand was really strong, that would not be happening. But, then again, if demand was really strong a refiner could actually make money refining oil.

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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.

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