The Guest Blog

Schork Oil Outlook: Traders Get Last Laugh?

Stephen Schork, Editor, The Schork Report

According to the latest seasonal outlook for the end of the North American heating season (February to April), the International Research Institute (IRI) forecasts a 40 percent probability that temperatures will fall into the coldest third of years throughout market areas in the Gulf and Southeast.

Conversely, there is a 40 percent probability that heating demand in the U.S. Midwest, the largest residential natural gas market in the country, will fall into the lowest tercile.

Most importantly, the IRI is also forecasting a 55 percent probability that temperatures in western Canada will fall into the warmest tercile and a 30 percent probability temps will fall into the middle tercile. In other words, with only a 15 percent calculated probability of below normal temperatures, the odds of an early spring “break up” in the Canadian rig count are extremely likely, i.e., 1/5.

Despite what seemed like an overly bearish forecast by the Short-Term Energy Outlook (STEO), the February crude oil contract expired at 77.62, just 62 cents above the STEO’s 77.00 prediction. In this vein, the forecast for March comes to 76.00, and the Nymex closed Friday at 74.92.

This bearish action led to a decrease in our Confidence Interval, of course, from (71.44, 85.98) to (68.18, 81.49). But consider that CI for April is (65.81, 85.30), with the lower bound 3 percent lower and the upper 5 percent higher. This implies that if prices continue to drop, then support will be found sooner than a recovery will find resistance. We see a similar effect in our average CI for 2010, which shifted from (66.84, 98.10) to (62.58, 94.74) — a 6 percent drop in the lower bound but only 3.4 percent lower in the upper bound.

Natural Gas: Open interest in the Henry Hub contract rose for the fourth consecutive week according to the CFTC, rising 3.0 percent to 782,549 contracts as of last Tuesday. That raises the year-on-year surplus from 6.91 percent last week to 8.84 percent this week, and is most likely contributing to the increased volatility seen in the contract.

Total length held by swap dealers and money managers continued in the vein of last week’s 20.0 percent increase by rising 14.6 percent to 47,409 contracts. This is a bullish signal and could imply continued upward strength — prices have risen 4.7 percent since Tuesday.

Oil: Our hats off to the smart money non-commercials who correctly predicted crude’s sliding price. According to the CFTC, net length held by swap dealers and money managers in the combined Nymex/ICE WTI futures peaked on December 29th with 368,618 contracts. As of last week, it is down 6 percent from this peak and 2 percent week-onweek at 346,473 contracts.

They were a week off, and might have lost a little in the January mini-bubble, but he who laughs last...


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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