Schork Oil Outlook: Crude Aiming for $100?

Crude closed yesterday (Monday) at highest point since October 2008 — coincidence?

Yesterday’s strength in crude oil price was not based on concerns of a shortage. Russia announced on Sunday that it produced 123.86 million tons of crude and gas condensate in Q1 2010, 3.2% above Q1 2009 and its highest output level since the breakup of the Soviet Union.

OPEC is not willing to cut back its production in response. Iran, Venezuela and Angola have been openly flouting their OPEC quotas in recent months. According to Bloomberg, Iran’s current output stands at 3.82 MMbbls/d, 15% above OPEC’s 3.33 MMbbls/d quota, while Angola pumped 1.75 MMbbls/d, 10% above its 1.656 MMbbls/d alleged quota.

Keep in mind these numbers are reported by the countries or estimated by outside observers, so underestimation is likely the word of the day.

Further East, Syria served notice on Friday that it will increase year-on-year crude production for the first time in 14 years. The country is pumping 0.38 MMbbls/d and expects this to increase above 0.40 MMbbls/d in the coming months as joint ventures with Russian and American companies come on-line.

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Even traditionally conservative Saudi Arabia and the UAE have added production capacity. Put simply, OPEC refuses to cut its quotas under the assumption that global demand will pick up to absorb the spare barrels currently in the system. But when every one of the world’s largest oil producing nations is flooding the system with barrels, the market will need a very large sponge.

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This is where Friday’s jobs data may be fuelling the bulls. Total non-farm payrolls rose by 0.13% to their highest point since September ’09. The year-on-year deficit decreased to 1.76%, a stark improvement from January’s 2.96% y-o-y deficit. But, as analyzed in the March 8 issue of The Schork Report, it is the type of jobs which matter.

Manufacturing jobs increase domestic energy demand, from the coal to fuel furnaces to the diesel to fuel freight transport. In that sense, the recovery is gaining momentum. Total goods producing jobs rose 0.23% after a harsh winter led to a drop in February, while jobs in the service industry only grew 0.1%.

Jobs in the oil and gas extraction industry surged 0.8% to their highest point since February 2009. In fact, extraction jobs are 0.06% higher year-on-year and 20.4% above the 2004-08 timestep. The increasing interest in domestic natural gas extraction, evidenced by Exxon’s take-over of XTO, is probably not good news for natural gas prices in the long run, but it is good news for laid-off workers in hard-hit areas such as Western Pennsylvania.

The coal mining industry also saw a 0.25% increase in jobs. This had a knock-on effect on jobs in electricity generation from fossil fuels, which rose 0.15%.

Tidal Wave of Supply

Tidal Wave of Supply

As illustrated in the chart of the day in today’s issue of The Schork Report, we have seen jobs shift from the hydroelectric sector to nuclear and fossil fuels over the last decade.

This shake-up began at the start of 2002, has been trending steadily ever since and is likely to continue with President Obama’s plans for off-shore drilling. The obvious conclusion here is: more jobs equal more demand for fossil fuels… oh, excuse us, we meant to say… demand for “conventional energy.”

Another source of demand comes from the inter-modal transportation sector mentioned earlier. While truck transportation — a proxy for diesel demand — fell in February, and remains 4.9% below last year, it is up 0.05% month on month. This sluggish pace is discouraging but likely to pick up in line with summer demand.

Moving back to the economy as a whole, manufacturing jobs rose for the third consecutive month and are now 0.4% above December. Growth is likely to continue as hours worked rose 0.5% to 39.9 hours per week, 3.9% above 2009 and are approaching the 2006-08 maximum of 40.4 hours.

Of course, it would not be The Schork Reportif we did not voice our concerns about the economy — the unemployment rate remains at 9.7% and could increase as discouraged workers return to the workforce, looking for jobs which may not have materialized yet. Increasing gasoline prices at the pump also have a tendency to strangle growth, as we saw in the summer of 2008. Is it a coincidence that prices closed yesterday at their highest point since October 2008?

Traders should keep this in mind as they aim for $100+. The bottom line is that American energy demand will rise in the short term, but there is a tidal wave of supply ready to meet it.


Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.