CNBC Guest Blog

Published: Wednesday, 28 Oct 2009 | 11:29 AM ET

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Stephen Schork
Editor of
"The Schork Report"

Gasoline production is tanking. Over the last two DOE reports (October 09^th and 16^th), gasoline production averaged 8.46 MMbbl/d. That represents a drop from the prior two-week average of 803 Mbbl/d or 8.7%.  That is the second largest non hurricane-related drop in output since 1982, as far back as the DOE provides data.

Gasoline supplies are comfortable for this time of year, i.e. at the higher end of the 2003-07 range.

However, as noted last Thursday, the market is clearly growing uncomfortable with regard to supply (see Chart of the Day in today’s issue of The Schork Report ).

Since the beginning of the month the contango on the nearby winter-grade strip (X09 to H09) has narrowed, while the disposition on the summergrade strip (J0 to U09) has shifted from contango to backwardation.

In other words, the premium on owning gasoline on the front of the NYMEX curve is gaining on the back. That usually occurs when the market perceives tightness in the future availability of supply… and that is usually a bullish signal.

Refinery activity continues to lag, hence the market’s perception of pending tightness. Over the last four reports throughput averaged 14.3 MMbbl/d. That is 569 Mbbl/d or 3.8% below the 10-year average, exclusive of outliers in 2005 (Hurricane’s Katrina and Rita) and 2008 (Hurricane’s Gustav/Ike).  The drop in throughput coincides with the plunge in the NYMEX 3:2:1 crack spread we saw in September.

However, since the beginning of October the yield on the so-called refiner’s crack has rallied, up 393 bps to a 9.4% yield over the last two weeks. That could translate into greater than expected demand for crude oil once refiners return from maintenance.

Demand went missing in last week’s DOE report, despite a spike in furnace demand. For example, New York City saw 108 heating degree days (HDDs), 55 days or 104% above normal. Chicago saw 162 HDDs, 80 days or 98% above normal.

On one hand we did get a large draw in propane, but in light of the brutal cold in the central U.S., the reported 1.3 MMbbl draw seems reasonable. On the other hand, a meager 0.23 MMbbl (-0.5%) draw in PADD 1 heating stocks (>.05%) does not seem reasonable. 

In fact, according to the DOE’s product supplied estimate, aggregate demand over the last four reports averaged 18.8 MMbbl/d. That is 1.6 MMbbl/d or 8% below the 2003-2007 average. In fact, a year ago at this time the global economy was staring into the abyss, yet current demand is only 0.5% greater this year.

Over the last month NYMEX oil traded at a 22% discount compared to last year, but that was only good for a 0.5% uptick in demand. However, over the last week-and-a-half the year-on-year disposition shifted from a discount to premium. For example, through the first half of October 2008 spot NYMEX oil averaged $87.73. Through the first half of this October oil averaged $71.39. However, through the second half of October 2008 oil dropped to an average $68.26. So far in the second half of this October oil is averaging $79.13.

More importantly, per Monday’s update from the DOE, gasoline prices at the consumer level moved into a year-on-year premium for the first time this year.  Given last year’s implosion in the bubble at this point, the year-on-year premium will continue to increase now through the first quarter 2010.

Meantime, since December, retail gasoline prices have jumped more than a dollar a gallon or 66%, while 4.1 million Americans have lost their jobs. Therefore, we have to ask, why was yesterday’s sharp drop in consumer confidence, purportedly “unexpected”?

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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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