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Schork Oil Outlook: Today's Most Important Indicator

Last Wednesday the U.S. government reported that net commercial crude oil stocks rose by 2.9 MMbbls or 0.9% to 335.6 MMbbls. All told, total crude oil inventories (commercial + SPR) in the U.S. as of Friday, September 18th increased by 0.3% to 1.061 billion barrels.

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On the major products side, ?2 oil supplies surged by 2.96 MMbbls or 1.8% to 170.8 MMbbls and forward cover moved to 50.1 days; the highest level since 1991, as far back as the DOE provides weekly data. Furthermore, stocks of distillate fuels climbed above the 170 MMbbl threshold for the first time since January 1983!

As far as gasoline goes, stocks ballooned by 5.4 MMbbls or 2.6% to 213.1 MMbbls. The year-on-year surplus spiked by 674 bps to 19.2% or 34.4 MMbbls and forward cover increased to 23.3 days as a result. Forward cover compared with the corresponding week from a year ago is 4½ days greater.

Highlights from last week’s report:

Gasoline production tumbled to 8.9 MMbbl/d. Gasoline output over the last four reports averaged 3.9% above the five-year average. As a result, gasoline supplies moved to a two-month high, 213.1 MMbbls.

The Carbon Challenge - A CNBC Special Report - See Complete Coverage
The Carbon Challenge - A CNBC Special Report - See Complete Coverage

According to the latest numbers from the Federal Highway Administration, vehicle miles traveled (VMT) increased by 2.3% in July compared with a year ago. As we discussed yesterday, Urban driving is considered to have a higher degree of demand inelasticity, while Rural driving (incl. recreational driving) involves a greater amount of discretionary demand and is therefore more sensitive to price.

In July, rural driving was higher for the fourth straight month, up 3.9% from last year. That’s the biggest year-on-year increase we’ve seen since 2007. Meanwhile, urban driving was only up 1.3% and the first half of 2009 is still 0.8% lower than 2008. Ostentatiously that lends credence to an employment lag from the nascent recovery; discretionary demand responded to lower year-on-year prices, but nondiscretionary demand lagged.

However, the discretionary demand season is over and the jobs outlook is tenuous (see chart in today’s issue of The Schork Report ). As such, the outlook for a rebound in gasoline demand is tenuous as well.

The Conference Board’s Consumer Confidence Survey took an unexpected tumble in September. The consumer number is not hard to reconcile (see today’s Chart of the Day). The 2001 recession ended in November 2001 and confidence initially rose; but as jobs continued to lag, confidence re-tumbled in accord.

Thus, a similar dynamic is at play today…

“If one considers the people who would like a job but have stopped looking—so-called discouraged workers—and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4 percent to 16 percent.” -Fed Bank of Atlanta President, Dennis P. Lockhart, August 26, 2009

“The level of unemployment is unacceptably high… And will, by all forecasts, remain unacceptably high for a number of years.” - National Economic Council Director, Larry Summers, Politico.com, September 11th, 2009

“Even though from a technical perspective the recession is very likely over at this point, it is still going to feel like a very weak economy for some time as many people still find their job security and their employment status is not what they wish it was…” - Federal Reserve Chairman, Ben Bernanke, Wall Street Journal, September 16th, 2009

Distillate production was strong over the last four weeks. As of last Friday output averaged 4.15 MMbbl/d or 4.1% above the five-year average. As such, the ?2 oil glut continues to build: 35 MMbbls (+26%) above the 2003-2007 average.

  • Alternate-energy scramble on across West

However, overall stocks of transportation fuels (on highway diesel and gasoline) on the West Coast (PADD V) are below our comfort level; and that was even before last week’s fire at Tesoro’s facility near Los Angeles. Here at The Schork Report , we will pay special attention this morning to the PADD V numbers.

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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.