The Guest Blog

Schork Oil Outlook: Economic Rebound Without Manufacturing?

Stephen Schork, Editor, The Schork Report

ENERGY PRICES WERE MIXED ON TUESDAY… oil marketsin London and New York bounced after the rhetoric out of Russia (re the dollar) did a u-turn.

Meantime, natural gas futures suckered the bulls… once again. As far as today’s DOE report goes, the crowd is expecting a net build of 1.5 MMbbls in the major products and a large 2.0 MMbbl draw in crude oil.

We know yesterday’s better than expected (less bad) housing numbers got all the press, but we also got news that the U.S. factory economy is still flagging…and that is putting it mildly. According to the Fed, manufacturing output fell 1% last month and was more than 15% below its year-earlier level. The factory operating rate decreased by 60 bps to a historical low of 65%; prior to this recession, the low for this series, which begins in 1948, was 68.6% in December 1982.

That is bloody significant, especially as far as those alleged green shoots are concerned. As we illustrate in the Chart of the Day in today’s issue of , capacity utilization in Manufacturing bottoms at the end of the recession, without outliers. In other words, even though manufacturing’s share of the U.S. economy has been trending lower over the last sixty years, we have never come out of a recession without a commensurate bounce in manufacturing.

In this vein, with the retrenchment at Chrysler and G.M. (and the attendant knock-on to spin-off markets—autoparts, metals, power-gen… etc) pending, the industrial and capacity figures will likely not improve in the month’s ahead.

In other words, if the U.S. recession has already ended (as some have proposed) or it is about to end (as some others are proposing), then it will be will be doing so without the manufacturers… and that has never happened before.

Bottom line, even if the recession has ended or is about to end, that does not mean demand is about to resume. It just means demand has stopped falling. However, speculators are betting otherwise. Going back to today’s Chart of the Day, gasoline at the pump peaks at the start of the recession and trends lower through the recovery. However, this time, beginning back in March, gasoline prices began trending higher. On the other hand, manufacturing utilization has now posted five straight record lows.

Thus, industrial demand is still falling, but speculators are in the process of bidding gasoline back up to $3. Something has to give… right?


Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.