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Schork Oil Outlook: The Not-So Smart Money

Energy prices were strong yesterday - And how!

A very bearish DOE report and resurgent dollar couldn’t stop the February WTI contract from crossing its 2009 83.19 high print. Equally, natural gas bulls shrugged off some end-of-month warm weather forecasts for Chicago and instead focused on the potential of well freeze-offs this weekend in the Producing Area.

Yesterday the U.S. Government reported that net commercial crude oil stocks increased by 1.3 MMbbls or 0.4%. A massive build in the Gulf Coast (PADD III) was the culprit behind the “unexpected” increase in overall U.S. crude oil inventories. On the other hand, inventories fell in every other market area.

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Supplies in the Midwest (PADD II) fell in the aggregate, but inventories at the NYMEX hub in Cushing, OK increased to a record 35.7 MMbbls.

In other words, you can’t swing a cat without hitting a barrel of oil at the delivery point of the NYMEX contract, yet that NYMEX contract rallied to a 15-month high upon receipt of this news.

Supplies of No.2 oil dropped by a light 0.23 MMbbls (-0.2%) to 159.1 MMbbls. The bulk of the draw accrued on the heating oil side of the ledger, particularly in the East thanks to weather-related demand. However, one market’s tonic is another market’s poison, i.e. weak transportation demand is often a corollary of weather related demand for heating Btus. To wit, despite a 41 point dip in refinery utilization rates, supplies of both diesel fuels and gasolines increased.

Key takeaways from the DOE report:

- The NYMEX crude oil hub in PADD II is absolutely brimming with oil. Imports into the Midwest dropped by 33 Mbbl/d (-2.7%) and refinery runs jumped by 175 Mbbl/d, yet net supplies inched down by only 55 Mbbls (-0.07%) in the entire region, but rose to a new record at the NYMEX complex.

At the same time PADD II gasoline supplies rose by 1.3 MMbbls (2.5%) and distillate supplies rose by 1.0 MMbbls (3.1%). Therefore, with the ramp up in refinery throughput (outside of the NYMEX complex) and winter storms retarding transportation needs, supplies of the two major products groups rose.

Conversely, supplies of propane dropped hard, again. Since the start of winter supplies have dropped by 38%, as opposed to a 31% drop in the Gulf Coast (PADD III). However, PADD II supplies still enjoy a 1.3 MMbbl (7.2%) surplus to a year ago, while supplies in the Gulf have since morphed into a 8.6 MMbbl (-27%) deficit.

- Heating oil stocks (>0.05%) in the East (PADD I) fell by a seasonally heavy 1.02 MMbbls (-2.8%). To wit, revelers on New Year’s Eve in New York’s Times Square enjoyed relative balmy conditions; heating degree days (HDD) were 4.2% below normal through the week. Nevertheless, the comparison to the corresponding report from a year ago narrowed by 97 bps to 24.6%.

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

The book is now closed on December. The final monthly numbers for heating oil supplies in the East will likely finish in between 34.2 and 36.4 MMbbls. This leaves a surplus to December 2008 of between 13% and 20.2% and the disposition to the December 2003-2007 average of between a 2.1% surplus and a 4.03% deficit.

Back in October, the latest date for which the EIA provides monthly numbers, the year-on-year surplus was 41.4% and the surplus to the 2003-07 average was 10.6%. With HDDs forecast to remain high through at least the next two weeks, and crude oil throughput in the East currently running around 32% below the 2003-07 average and 23% below a year ago, the table is set in January for another material contraction in the yearly comparisons.

- Winter storms might explain the poor demand figures in the East and Midwest for transportation fuels, but no such excuse exists for the lousy demand in the West (PADD V).

Crude oil imports jumped by 29% or 314 Mbbl/d to 1.03 MMbbl/d and refinery throughput dropped by only 20 Mbbl/d. However, crude oil supplies dropped anyway, down 0.95 MMbbls (-1.7%). At the same time diesel fuel supplies rose by 0.35 MMbbls (2.9%) to 12.2 MMbbls and the year-on-year surplus increased to 0.44 MMbbls (3.8%). Gasoline supplies in the largest automobile market in the U.S. rose by 2.3 MMbbls (8%).

Therefore, it is not unreasonable to say that industrial and commercial demand (intermodal) as well as residential demand (transportation) in the West, as in the four other market areas around the U.S., for fuel is poor.

Regardless of this fact, the smart money [sic] on Wall Street obviously thinks that IT JUST DOESN’T MATTER!

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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.