The Guest Blog

Schork Oil Outlook: Wall Street vs. Nymex?

Stephen Schork, Editor, The Schork Report

Last week, Chevron set off a flare when it warned analysts on the Street that its fourth quarter 2009 earnings would underwhelm, thanks to poor refining margins.

In a followup to that warning, the company yesterday (Tuesday) disclosed it was “restructuring” its downstream business to make it “leaner,” i.e., the company will slash (a yet to be determined amount) of its refining workforce.

This announcement is hardly surprising. In 2009, oil companies, in the U.S. and abroad, had to divert their attention from addressing confiscatory “windfall” profit tax scheme proposals, to simply trying to make a profit. As such, Chevron, Total, Shell… etc. have all gone on diets.

According to the latest numbers from the U.S. Bureau of Labor Statistics (BLS), average weekly hours for production workers at U.S. refineries fell to a four-month low in November, 43.9 hours. Over the past 12 months, the average work week dropped 6.4%.

With refining margins still lagging, we doubt employment prospects on the downstream side of the business will improve this quarter. To wit, through the first half of this month the spot Nymex 321 crack (the so-called “refiner’s crack”) is averaging a woeful 696 bps below the corresponding 5-year average. As such, U.S. and European refiners will look to get even leaner in the month’s ahead.

According to the monthly numbers from the DOE, U.S. refinery crude oil inputs in October 2009 were 499 Mbbl/d, or 3.4% below October 2008. Inputs per the DOE’s weekly reports through November and December averaged 637 Mbbl/d or 4.4% below a year earlier. Through the first full week of 2010, year-on-year crude oil inputs were off by 581 Mbbl/d or 4%.

The apparent lack of demand by refiners to own crude oil has yet to discourage Wall Street from selling it to its clients. As we highlighted last week in , “poor” refinery economics have thus far led to the permanent destruction of 446 Mbbl/d of European and North American crude oil demand, and upwards of 1.2 MMbbl/d of temporary demand.

According to last Wednesday’s DOE report, crude oil inventories as of January 8 at the Nymex delivery hub in Cushing (PADD II) fell 3.4% from an all-time high to 34.47 MMbbls. Yet, according to the CFTC, as of January 12, noncommercial traders (aka speculators) upped their ownership by 24.7% to a record 135.7 MMbbls (135,669 futures contracts).

Storage capacity at the Nymex complex in PADD II is estimated anywhere in between 37 MMbbls to 47 MMbbls. Therefore, speculators currently own upwards of three times the capacity of the Nymex delivery hub.

In the meantime, the oil industry is slashing crude oil demand in an attempt to improve margin. What does this mean for potential consumption this summer?

In light of these efforts, along with last week’s stronger than expected retail gasoline numbers, we thought it relevant to consider the Bureau of Economic Analysis’ (BEA) release for personal consumption expenditure on gasoline and other energy goods. The figures for Q4 2009 will be released at the end of this month, but what should traders be looking for?

Expenditure on gasoline and energy dropped from a peak of $461.40 billion in the third quarter of 2008 to $271 billion by the first quarter of 2009, the lowest level since Q3 2004. In relative terms, the average consumer went from spending 19.4% of their nondurable goods expenditure on gasoline to 12.5%.

With the recovery in prices, that expenditure has increased slightly, up to 14.5%, but the concern is how much demand destruction, if any, took place over the same period. Consider that since hitting bottom in Q1 2009, PCE on gasoline recovered to $324.4 billion in Q3 2009, around the same level as Q1 2007. The difference being that prices at the pump in Q1 2007 were $2.66 compared to $2.55 in Q3 2009.

Consumers are spending more on gasoline despite lower gasoline prices, in line with yesterday’s retail gasoline sales numbers. Further, vehicle miles travelled recovered to 254.23 billion miles in Q3 2009, its highest levels since Q3 2007. Simply put, people are driving more and using more gasoline than they were in the depths of the recession.

Whether this rate of expenditure can be expected to continue is less certain. PCE on motor vehicles and parts remains anemic at $331.7 million, the same level as Q3 1998. Factor in inflation and that number becomes even weaker.

On the other hand, PCE on transportation services held steady through the recession, never falling below 2006 levels. At $306.3 billion in Q3 2009, it is less than $4 billion away from its all time high in Q3 2008. This can partly be explained by more drivers giving up their cars to favor public transportation. This trend can be expected to continue if gasoline prices trend higher.

Once drivers give up their gas guzzlers for a Prius they do not tend to revert, and the high unemployment rate amongst teenagers (27.1% in December) means new customers are not snapping up Hummers like they were in 2006.

Analysts at believe much of the recovery in PCE on gasoline and energy goods has already taken place. Thus the next BEA release should be approached with caution. However, this may not prevent the bulls from running prices beforehand.


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.

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