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Schork Oil Outlook: Chavez to the Rescue?

Hugo to the rescue… puhleeze!

In perusing the news before Thursday's open-outcry session, we came across a headline from Latin America’s most ardent Bolivarian. Apparently Hugo Chavez thinks the U.S. is distorting the situation in Libya “… to justify an invasion.”

As if the video being shown on CNN, BBC et al. has somehow been staged (perhaps on the old set from Capricorn One) by the U.S.

Why is the U.S. doing this… um, perhaps to compound all of that oil we allegedly siphoned out of Iraq?

We therefore just figured this was some tired Chavista boilerplate blabber and did not bother clicking on the story.

However, with Nymex crude oil moving lower yesterday we received two calls from the media asking if the selloff in oil was in anyway related to Chavez’ invitation to broker a peace plan between Gaddafi (a close ally to Chavez) and rebel forces in Libya.

By the close of trading yesterday this story had picked up legs. Be that as it may, we are incredulous to the notion that Chavez’ sophomoric attempt as some kind of half-a**ed Kissinger pushed oil prices lower yesterday. Besides, given the way he has mucked up Venezuela’s economy, Chavez has to talk oil prices higher, not lower.

Today’s issue of The Schork Report proposes another reason for yesterday’s weakness.

Per last Friday’s Commitment of Traders Report from the CFTC, in the course of five trading sessions, from February 15th to the 22nd, oil speculators (managed money accounts) upped their net length by one-fourth to a record 206,023 contracts.

When you break that down, then what is actually happening is the investor class (e.g. perhaps the folks managing Wisconsin’s statewide pension fund) have promised to own 206,023,000 barrels of NYMEX spec crude oil at some point in the future.

Meanwhile, per Wednesday’s report from the DOE, storage at the NYMEX storage hub in Cushing, OK hit a record 38.6 MMbbls. The capacity at Cushing is under expansion, but for the time being the most reliable estimate of working capacity there is approximately 42 MMbbls.

Bottom line, if money managers investing on behalf of pension funds, college endowments, etc. want to take delivery of all of that oil they are currently on the hook for, then they will have to find space for 5.3 barrels for every 1 barrel of tank capacity… and that is not taking into account that storage at Cushing is already (virtually) maxed out.

Today’s Report sheds light on the looming weakness in oil… overextended commodity funds and most certainly not the delusional aspiration of an acolyte of a bankrupt political theory.

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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.