The Guest Blog

Schork Oil Outlook: It’s a Contango Market…Demand is Not Real.

Stephen Schork, Editor, The Schork Report

Since everyone on the Street apparently loves second derivatives, then the second derivative on the NYMEX term structure is negative and it is growing. Thus, the incentive to hoard barrels, rather than burn them has increased through the peak of the summer driving season… with the ability to sell into the curve, the market is paying you – whether you are in New York, London, Dubai or Tokyo – to carry inventory forward. If there was real demand in this market, that could not happen.

But demand is not real. In this vein, according to numbers from the Bureau of Economic Analysis (BEA), personal consumption expenditures (PCE) on gasoline (seasonally adjusted) in the second quarter were $277.6 billion. Given that retail gasoline surged around 22% on the quarter, from $1.89 a gallon (an 18-quarter low) to $2.32, that was below the $300 billion we expected (schork-TSR-20090701) and therefore implies a significant increase in demand destruction at the pump.  It was also well below the $441.9 billion gasoline PCE for the corresponding time step from a year ago, as well as the third quarter 2008 peak, when gasoline averaged $3.897, for a PCE of $461.4 billion. 

Retail gasoline has jumped another 12% since the start of the third quarter. Gasoline at the pump is thus far averaging $2.60. Should that average hold we will look for gasoline related PCE at $330 billion (SAAR) this quarter. That is obviously favorable when compared to a year ago, but it is a considerable shock to the one-and-a-half million Americans (and counting) that have lost their jobs since the first quarter (when the gasoline PCE was just $271 billion) or to all those Americans who are in arrears with their mortgages (mortgage delinquency rates in the U.S. hit an all-time high in the second quarter, 5.81%).

bottom line: gasoline spending as a ratio of total consumption was 2.7% at the start of the second quarter, but 3.1% by the end. With the increase in gasoline prices since then, more dollars are being allocated this quarter towards gasoline. Those are dollars that cannot be spent elsewhere in the economy.


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.