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Schork Oil Outlook: Looking Through The Prism of Wall Street’s Up Is Down World

Per last week’s DOE repot, refinery activity ground to a virtual halt. Over the last four reports throughput averaged 14.5 MMbbl/d. That is 347 Mbbl/d or 2.6% below the 10-year average ended 2007, exclusive of outliers in 2004 (Hurricane Ivan) and 2005 (Hurricane’s Katrina and Rita). As Platts put it last week, refinery throughputs plummeted “…on weak margins”.

This drop in throughput is reasonable. In the September 17th issue of The Schork Report we commented how the NYMEX 3:2:1 crack spread was yielding only half its August highs. Therefore, in the week’s ahead the table was set for a significant drop in refinery throughput with a corresponding drop in demand for crude oil. Indeed.

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Nevertheless, the market on the NYMEX received last week’s drop in refinery activity as bullish. Thus, only through the prism of the up is down worldof Wall Street groupthink do weak margins on refinery outputs translate into a rosy outlook for refinery inputs. The other key takeaway last week was the plunge in gasoline output. One week after surging to a 57-week high, 9.42 MMbbl/d as of October 02nd, output for the following week purportedly plunged 10% to a 55-week low, 8.45 MMbbl/d.

That is to say, gasoline production per last week’s report was lower than a year ago, when the PADD III downstream complex was still recovering from hurricane-related shut-ins. Aggregate gasoline production as of October 09th dropped 10%, but discretionary blending (conventional + ethanol), was virtually unchanged, 4.01 MMbbl/d.

The Carbon Challenge - A CNBC Special Report - See Complete Coverage
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Be that as it may, last week’s reported 964 Mbbl/d week-on-week drop in gasoline was the third largest absolute drop since 1982, as far back as the EIA provides weekly data. The only two drops bigger than last week’s report were a 1.05 MMbbl/d drop last September for Hurricane Gustav and a 1.08 MMbbl/d drop in September 2005 for Hurricane Katrina. Last time we checked, there were no hurricanes last week. There were no disruptions to the downstream complex whatsoever… other than… lousy economics. But, as we all know by now, Wall Street thinks that’s bullish.

Suffice it to say, as illustrated in the chart in today’s issue of The Schork Report, we think either that reported surge in output for the week ended October 02nd was an outlier or the subsequent plunge was.

Today’s DOE report should give us an answer.

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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.