Schork Oil Outlook: Goldman Sachs Adds Insult to Injury

Even by the White Houses’ own admission, it is reasonable to assume the unemployment rate in the U.S. will remain stubbornly high for at least the next two years.

In yesterday’s issue of The Schork Report we talked about January’s decline in Vehicle Miles Traveled (VMT) in the U.S. A 20-year upward linear trend in VMT broke in the third quarter 2005.

That decoupling coincided with a massive uptick in retail gasoline prices that occurred in the wake of Hurricane Katrina. However, after that initial shock prices at the pump corrected and VMT continued to grow, but at a slower velocity.

VMT finally turned negative in late 2007 in accord with the start of the recession. All the while prices continued rising. As the picture below underscores, gasoline demand inelasticity as measured by VMT waned in between $2.90 and $3.20 back then. Current retail prices are now within 15 cents of this threshold. January’s VMT disappointed and February will likely be even worse as a result of poor road conditions. Yet Wall Street continues to spin a bullish case for oil.

The Street has been extremely vocal in its stance that oil is going to $85, $95… How can you argue against their deep pockets? Given where implied vol traded yesterday on the NYMEX, there is a 14% chance we can see $95 by June. For its estimations the EIA uses a “nominal” $1/gallon markup of retail gasoline over the refinery acquisition cost of crude oil. In this case, $95 oil translates into ?$3.25 at the pump, i.e. a nickel above the VMT comfort zone.

Thus, with weekly unemployment insurance claims in the U.S. stagnant in the mid 400Ks, the table appears set for further demand destruction for gasoline… not just in the U.S., but in Europe as well.

Raising concern with analysts at The Schork Report is that Goldman Sachs trumpets (sans hard statistics) the prospects of $85 out of one side of its mouth; then, out of the other side of their mouth they recently add Total SA, the third largest oil company in Europe, to their conviction sell list. So a fundamentally driven rising oil tide apparently does not lift all vessels?


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.