How much oil can the US buy?
Domestic GDP growth for Q2 fell well below expectations. Is the recovery — already slow — grinding to a halt? Or was the drop in dollar terms due simply to a sharp sell-off in energy prices? While we would love to say the latter, the truth lies in parts of both.
Consider that spending on gas and energy declined precipitously from $274.4bn in Q1 2011 to $269.50bn in Q2. This is the lowest level seen since Q4 1996 despite the nominal price of WTI futures coming in 268.13% higher. Our analysis uses the futures contract rather than the retail price of gasoline to encompass diesel and other energy prices.
The picture is even worse when one considers that Q4 is expected to see lower demand due to weather related disruption (Q2 consumption of gasoline and energy usually comes to a median 0.26% premium as compared to Q4). On a quarter to quarter comparison, 2011 saw the lowest second quarter since 1995.
What does this mean in relation to the price of crude oil? The chart in today’s issue of The Schork Report illustrates the number of barrels that could have been purchased each quarter if all spending on gas and energy had been used to purchase crude oil on the futures market. The results are striking.
In Q1 1990, Americans spent $159.60bn on gas and energy. With a futures price of $20.28, that would have allowed them to purchase 7.87 billion barrels of crude oil per quarter. By Q4 of 1998 the economy was booming and personal consumption of gas and energy came to $287.10bn, while the cost of crude actually fell to $12.05, resulting in a ‘purchasable’ barrels figure of 23.83 billion barrels. And it was all downhill from there.
The commodity bubble almost seems justified when one considers that by Q2 2008, consumption of gas and energy came to $282.70 billion, and with futures trading at $140.00, that meant we could purchase only 2.02 billion barrels, 91.52% less than Q4 1998 levels.
Currently, the picture is not as bad as 2008, but we are close. In fact, Q2 2011 was actually a better figure thanQ1 if we consider that spending on gas and energy fell by 1.71% while the price of WTI fell by 10.59%. But we are in a precarious situation. According to the EIA, total domestic consumption of petroleum came to 19.18 million barrels/d in 2010, or ~1.75 billion barrels per quarter.
Now consider the difference between what we consume and what we can theoretically purchase. The EIA only provides annual data, but for the purposes of this study we will assume that each quarter consumes the same level of petroleum, which may not be true, but for the purpose of this study is more useful than introducing seasonal scaling factors (in much the same way as the Black Scholes model assumes constant volatility).
As mentioned previously, in 1998 we could theoretically purchase 7.87 billion barrels of crude, but according to the EIA we only consumed 1.55 billion barrels, leading to a 6.320 billion barrel surplus, so wide, that it need not even be considered. By Q4 1998, the surplus was as wide as 22.10 billion barrels. But by Q2 2008, it had contracted to just 240 million barrels.
The correlation of surplus against the price of WTI is illustrated in today’s issue of The Schork Report. Despite the sell-off in Q2, we remain at historically low levels. This may not affect day-to-day price movements, but it is increasingly difficult to imagine WTI sustaining prints below $90.00, or even $80.00 in the current domestic climate, to say nothing of a weaker dollar and international supply disruptions.
Put simply, the short term may be an open game, but in the very long term, the bulls have the ball.
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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.