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Schork Oil Outlook: Crisis of Confidence

Monday, 9 Aug 2010 | 8:56 AM ET

Over the last two months The Conference Board’s sentiment index of American consumer confidence has fallen from a two-year high of 62.7 to a five-month low of 50.4.

While that is still nearly double the all-time lows from the depths of the recession last year, it has now fallen back below the level from summer 2008, i.e. when there was an actively traded market for December 2008 $200 calls on NYMEX crude oil!

Of course a not-so funny thing happened on the way to $200, namely, the U.S. sank into the worst economic contraction since the 1930s and as we just saw on Friday, we are in the midst of—for all intents and purposes—a jobless recovery.

Thus, while we did express some optimism on page 2 of today’s issue of The Schork Report regarding the jobs data, we still have to wonder if $80 oil (?$2.90 at the pump) is justified in an economy where the private sector is barely hiring.

While we liked the fact that the manufacturing sector added 36K jobs in July , we hate the fact that 4 out of 7 of these jobs were in the auto sector… where a good deal of taxpayer funds are still tied up.

We know from the data from the Federal Highway Administration that inelasticity of demand for gasoline wanes in between $2.90 and $3.30 and begins to fall with prices above that range… and that was when a lot more people had jobs and the value of their homes (assuming they still are in them) was a lot greater than they are worth today.

The Bush and Obama Administrations have thrown trillions of dollars of “stimulus” at this economy to revive it and yet 4 out of 9 of the 479K workers who filed for first time unemployment insurance claims last week will still be out of work six months hence.

Clearly something is not working here. Companies are sitting on cash and (cue your personal political ideology to assign blame) are not interested in expanding their payrolls. Politics aside, given the way credit evaporated last year and the way taxes and employee healthcare costs are set to rise, with the latter being incalculable, we can appreciate why preserving cash flow is of the utmost priority for a lot of employers.

Private sector jobs are coming back, albeit glacially. However, with every dollar increase above $80 for oil, it is going to make it that much harder.

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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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