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Schork Oil Outlook: Good News Hidden in Bad

Last week saw the release of the latest Federal Highway Administration Vehicle Miles Traveled (VMT) statistics. The report appeared bearish — total miles travelled in February were down 2.9% year-on-year and cumulative travel for 2010 was down by 2.3% year-on-year.

While this data is seasonally adjusted, it does not account for the especially severe weather conditions in 2010, as well as higher prices at the pump. Further, the break-up of urban vs. rural driving demonstrates that the drop in demand was, forced and not discretionary.

The Chart of the Day in today’s issue of The Schork Reportillustrates how well driving in 2009 held up, despite bearing the worst of the economic recession. This was not due to consumers prizing their car above all else, but instead the cheapness of gasoline.

Total miles travelled in February 2010 came to 212.9 billion miles, while prices at the pump averaged $2.71. In comparison, February 2009 saw travel of 219.2 billion miles while prices averaged $1.96. Put that in to perspective, a 6.3 billion mile, or 2.9% drop in miles travelled does not seem so drastic considering a 38.3% increase in prices.

On a statistical basis, we should have seen the complete opposite. The effect of de-seasonalization makes quoting a % change in price to % change in VMT unsuitable, but given the price increase, we would expect to see VMT stand closer to 214.9 billion miles travelled. That accounts for ~4.3 million miles or 72% of the 6.3 billion mile deficit.

We believe the rest can be regressed on weather. The last time the U.S. saw comparable winter storms was January 2002, which stifled the economy further in the aftermath of the 2001-02 recession. That year, VMT for January was 2.9 million miles below the previous year after accounting for de-trending. Taking into account the weather, and the hike in prices, VMT should have approached ~212.0 billion miles, 0.4% below its actual value.

Mathematical inference aside, rural vs. urban driving paints a simpler picture of driving (and thus gasoline) demand. Rural driving is a proxy for discretionary driving — think Thanksgiving trips to family, summer holidays to the beach.

Meanwhile, urban driving is more static, people report to work every day, and a delivery truck drives the same distance even if its cargo is smaller. When the recession hit in earnest, in summer 2008, we saw the average daily distance travelled on rural roads plunge 7.0% between June and September, while urban driving only fell 2.5% over the same year.

In February of 2010, urban driving was 3.0% lower year on year while rural driving was only 2.8% lower. The fact that rural and urban miles fell by the same amount implies that travel was disrupted for all vehicles. In fact, the relative strength in rural VMT compared to urban implies consumers are returning the pump in greater measure than they were last year.

The bottom line is that much of February’s drop can be placed on the weather and higher prices. Analysts at The Schork Reportare projecting strong numbers from both urban and rural drivers in March, further cementing demand for gasoline and diesel fuels.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.