Schork Oil Outlook: The Bulls Have it all Wrong

“The oil companies reported the highest profits in the history of the world. I want to take [emphasis ours] those profits and I want to put them in an alternative energy fund.” Senator Hillary Rodham Clinton, DNC Winter meeting, February 03, 2007 - CSPAN

Boy, it was just a couple of earnings seasons ago that then-aspiring presidential hopeful Hillary Clinton appeared to take her rhetorical cues from Venezuela’s Hugo Chavez. While both sides of the political aisle in Washington has it share of working-class poseurs, willing to partake in the obligatory demagoguing of corporate profits, Mrs. Clinton had a knack for lifting populist pandering to a whole new plane.


Two years (and a lot of jobs) have passed since Big Oil was everyone’s favorite whipping boy.

In the interim, Washington, for the moment, has had to tone down its Che-esque bombast a few notches.

While the long-term prospects for oil and gas producers remain rosy, this earning’s season will be anything but. Analysts on the Street expect that energy company earnings per-share in the MSCI World Index will fall by half this year.

Today BP, Europe’s second largest oil company, said profits fell 53 percent on… “little evidence”… of a recovery in demand. Meanwhile, Valero , the largest refiner in the U.S., posted its first loss in the second quarter since 1999, i.e. when crude oil on the New York Mercantile Exchange averaged $17.67 a barrel.

Crude oil in the second quarter of this year averaged $59.79 a barrel. However, gasoline only averaged $1.715 a gallon, thus the margin between what the refiner buys (oil) and what is sells (gasoline) was only around 20 percent or around 10 points below historical norms.

Thus, as we look forward to the second half of this year, earnings from Big Oil will remain under pressure. After a retrace in the first half of July to the low $60/high $50 area, crude oil prices on the NYMEX rocketed back and are now in position for a run towards $75… and beyond if you read the tea leaves… er… research reports, published by Wall Street’s best-and-brightest [sic].

Normally, as the economy recovers from a recession, fuel costs follow, i.e. as demand picks up, prices rise… albeit with a lag. However, this year traders are tripping over themselves to trump the market. Instead of waiting to see real economic demand pull up fuel costs, we are pushing up fuel costs on the hope economic demand catches up. In other words, the bulls have it ass-backwards.

Be that as it may, the bulls now have a stranglehold on this market and the NYMEX crude oil contract is their preferred instrument to bludgeon the bears with. As such, the margin between refined products and oil is even uglier. For instance, gasoline on the NYMEX is trading at a mere 16% premium (half its historical value) to crude oil since the start of the third quarter.

In this vein, the bandits inside the D.C. beltway will have to wait a few more quarters before they can redistribute Big Oil’s profits.

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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.