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Schork Oil Outlook: Toying with Demand Elasticity

“At USD3.70/gallon in April (expressed in real 2008 dollars), retail prices are now well into the USD3- 4/gallon territory that typically triggers a fall in vehicle miles travelled…”
- IEA Analysis
16-May-11

Tell us something the market does not already know.

As we have noted ad nauseam, we know from experience (post Hurricane Katrina and the 2008 oil bubble) that demand elasticities shift with retail gasoline above $3.30, fall off above $3.50 and plunge at/above $4.

Be that as it may, the Wall Street community saw fit back in April to test this numerical fact. As recently as three weeks ago, money managers owned 62,866 contracts of Nymex gasoline ; 2.6× the amount of gasoline in PADD IB (inclusive of the Nymex hub in New York Harbor).

The Street has since been made to pay for toying with the elasticity gods. Spot Nymex gasoline for June delivery has dropped from a high of 341.55 on May 02nd to last week’s 284.28 low print, a peak-to-trough drop of 17%.

Not surprisingly, financial speculators have slashed their bullish view over the last two Tuesday’s by 18%.

In the crude oil market, money managers have cut their Nymex length since March 08th from a record 274,235 contracts to 212,008, -23%. Meanwhile, Nymex WTI has crashed from a 114.83 high and is now yo-yoing around $100, and ICE Brent has dropped from a high of 127.02 and is yo-yoing around $110.

Bottom line, since that historic plunge back in the first week of this month, both markets have settled in a congestive range; WTI at ?94/104 and Brent at ?107/116.

Analysts at The Schork Report are advising clients that these are critical points of reference. Therefore, a break above or below these levels will indicate who has control of this market.

Earlier this spring consumer automotive fuel in the U.S. and the U.K. had never cost more and prices on the Continent were approaching that level. In the East, Japan is now officially in a double-dip recession and questions regarding the sustainability of the U.S. recovery persist.

Along this backdrop we wait to see if Wall Street can once again shrug off these events.

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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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