US commercial stocks of crude oil represented as a ratio to total private employment population peaked at 5.3 (i.e. 5.3 barrels of oil to every 1 worker in the private sector) in early 1981 at the outset of the Iran-Iraq war. This ratio began to fall as the war in the Gulf (“Persian Gulf” if you were rooting for Iran, “Arab Gulf” if you were rooting for Iraq) escalated.
The downturn in the ratio of barrels to employment-population accelerated in 1984 as Iraq began its offensive against Iran’s merchant fleet (and Iran retaliated), specifically its oil tankers, and as U.S. domestic crude oil production peaked. The ratio fell from an average of 4.7 in 1983 to 4.06 by 1985.
The ratio fell through the through the 1990s as U.S production eroded. The comparison bottomed at 2.47 at the end of 2003 (i.e. less than half of where it stood in 1981) and yo-yo’d in between 2.48 and 3.07 for the next five years. Not coincidently, those five years marked the start of the greatest bubble in the history of oil trading.
In May 2004 the front-month Nymex contract broke through the $40 barrier for the first time in its history. The spot market then moved steadily higher (with considerable peaks and troughs along the way) until it peaked at $147.27 in July 2008 and imploded to $32.40 in December 2008.
Since then the ratio has been rising, thanks in no small part to BP (Thunderhorse) or as the Democrats would say “British Petroleum” [sic] and Chevron (Tahiti). According to preliminary monthly data from the DOE, June’s ratio of 3.36 was the third highest level since May 1995 despite the fact that global oil consumption has risen by 19%.
As we write about in today’s issue of The Schork Report, the point to take away here is that supplies of oil, especially at the Nymex delivery hub, are comfortable. Nevertheless, with the future prospects of domestic drilling in doubt, the front end of the Nymex oil curve has flattened significantly.
Back on May 13th, three weeks after the Deepwater Horizon explosion, spot WTI closed at a $4.59 (!) or 5.8% discount to the second month. Last night spot WTI finished at a $0.36 or 0.5% discount. The market is thus growing concerned regarding the future availability of oil… and that is clearly bullish.
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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.