The one thing that was clear through yesterday’s spastic post DOE response was the steepening of the forward curve.
For example, crude oil supplies have dropped in 10 of the last 11 reports, a streak that began on May 08th. Back then front-month WTI was trading 93 cents on the dollar to the sixth contract on the curve. Eleven weeks later and with more than 30 MMbbls purged from commercial stocks front-month WTI is trading at 91 cents on the dollar.
In other words, supplies are falling, at the height of summertime demand mind you, and the discount to own those supplies is growing.
Does this make sense? In a way it does.
Think of this market as any good retailer would. The season is winding down. Sales to date have been poor and our retailer has excess inventory on hand as a result. What does he do with his surplus? He can either hold onto it until next season, assuming his credit is good or he can liquidate it. What we call a contango on the NYMEX our retailer would call it by its other name… an end-of-season sale. In other words, spot oil is going on sale to clear the shelves for next season’s line.
This is why the analysts at The Schork Report maintain that the current string in crude oil draws (outside of the NYMEX delivery hub in PADD II) is not bullish. If demand was really there our retailer would not have to markdown existing supplies. Thus, current draws are not demand driven, but rather a function of lower domestic production and fewer imports.
Furthermore, if demand for crude oil, and by extension the stuff we actually need, i.e. gasoline and distillates, were actually real, then refiners would be boiling their tea kettles at something closer to 90% of capacity rather than at 85%.
Bottom line, it was a bearish report. Transportation fuels (gasoline, net diesel and aviation-kero) increased and crude oil decreased in accordance with end-of-season markdowns. But, that is not how the NYMEX reacted in the initial knee-jerk response in the report’s wake. Keep in mind, the DOE reports are not reliable. It is virtually impossible to gauge the ebb-and-flow of the petroleum complex on a weekly basis.
Consider, the U.S. government has all month to count the number of people unemployed in this country. This is one of the most important economics headlines out there. Yet, the Bureau of Labor Statistics consistently makes egregious revisions two months after its initial report.
Thus, if government bean-counters can’t get the monthly employment numbers right, then why the heck does the market put so much faith in its weekly oil numbers? It’s a good question.
What is even a better question… why does the market put any faith in the weekly API figures? We will be honest, here at The Schork Report we have always tended to ignore the API figures. When the API issued its report side-by-side with the DOE on Wednesday mornings this was easy to do. But now that the API releases its numbers on Tuesday evenings we can no longer ignore them.
This leads us to yesterday’s knee-jerk spike in the wake of the DOE report. That initial move higher occurred not because anyone (with a brain) thought the report was bullish. It occurred because a bunch of knee-jerk Jerks read into Tuesday’s API report, which showed a 3.1 MMbbl build in crude oil, and sold the NYMEX. Thus, when the DOE failed to corroborate the API, those same Jerks had to cover, hence the post report bounce.
In the future this is what we have to look forward too, i.e. outside moves following the APIs in thinly traded overnight electronic markets that will either be confirmed our voided the following morning by the DOE.
Welcome to the next installment of commodity market volatility.
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.