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Schork Oil Outlook: Where to Find Those Bullish Indicators

Per last week’s update from the Federal Highway Administration (FHWA), annual vehicle miles travelled (VMT), in real terms decreased from a peak of 3.04 trillion (×1012) miles in November 2007 to 2.93 trillion in November 2008. So May’s 0.07% increase in VMT over May 2008 is less bad instead of good, especially when we consider that cumulative travel through the first five months of 2009 is still down by 0.8% or 9.9 billion miles to 1.19 trillion miles.

The VMT becomes more interesting in the breakdown, when we look at rural vs. urban driving. Urban driving, which due to socioeconomic factors is considered to have a higher degree of inelasticity of demand, is a potent indicator for general economic health. In this vein, consumers have been choosing to drive less not since 2008 or 2007 but since 2003! That is, rural consumption, with a higher sensitivity to price, has been trending downwards for the last 6 years as illustrated in today’s issue ofThe Schork Report.

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The start of 2009 seems to show an uptick in miles driven, implying returning confidence. In fact, rural driving has been higher year-on-year for three of the first five months of 2009. Is that good news for the bulls?

Not quite.

The correlation between gasoline prices and miles travelled was -0.75 in 2003 and 2004. Higher gasoline prices led to decreased driving, as seen between October ’03 and April ’04, when gasoline prices rose 13.1% and miles travelled fell 9.2%.

Following a similar regression, the 39% decline in gasoline prices between June ’08 and May ’09 should have led to a 4.31% increase in rural miles travelled instead of the 1.05% increase we actually saw, that is, four times more people should have taken that trip to Disneyland with their family than actually did.

That’s not good news, in fact it’s barely less bad. Rural drivers are simply not responding to falling gasoline prices - the correlation between prices and miles driven has fallen to 0.43 over the last twelve months. With the price of gasoline recovering expect any further increase in rural miles driven to be severely tempered.

Those of you looking for bullish indicators however may find it in urban driving patterns. As illustrated in today’s issue of The Schork Report, urban drivers kept increasing between 2003 and 2007 despite higher gasoline prices. This was due to more jobs and thus more commuters. Urban driving began to falter on cue with the falling economy circa early to mid 2008.

However that decrease seems to have bottomed in January ’09. Average daily miles driven from February to May is actually up 0.01 Billion miles as compared to last year. Therefore, if the color of those much vaunted shoots really are green we can then expect urban miles driven to continue their recovery.

However, the behavior of urban drivers gives us only half the picture. According to Friday’s release from the University of Michigan, consumer confidence in July fell for the first time in five months. This drop coincides, not coincidentally in our estimation, with a 29% jump in retail gasoline prices since March. Thus, with oil prices once again on the rise, the downward trend in rural driving that we’ve seen for the last 6 years is probably not about to reverse.

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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.