Schork Oil Outlook: Oil into the Danger Zone

Per yesterday’s (Tuesday's) update from the DOE, retail gasoline prices in the U.S. hit another post bubble high, $3.189. In other words, U.S. consumers are now paying the highest price for gasoline since October 2008.

Unfortunately, there are a few huge — and we repeat, HUGE — differences between then and now.

For starters, in October 2008 the energy bubble had already popped and the oil markets were trending lower. Today, there is no bubble (yet), but the trend is decidedly higher. Why is the trend moving higher? Because Wall Street says oil should* move higher. After all, bear markets are so gauche….

Anyway, coming back to what is near-and-dear to most of us, the value of our homes continues to tank. After peaking in the summer of 2006 (when retail gasoline averaged $2.90 a gallon) home values per yesterday’s update from Case-Shiller have declined by nearly a third!

That bears repeating… the value of the largest investment for most (responsible and productive) Americans is down by more than 30%; yet gasoline is up by around 10% over the same timeframe. More importantly, the number of unemployed has soared. For instance, since the summer of 2006 the employment to population ratio has plunged by 500 bps to 58.4%.

Bottom line, prices at the pump are soaring, yet the value of our largest investment (for most of us) is in the doldrums and the employment picture is hardly secure. Furthermore, as illustrated in the Chart of the Day in today’s issue of The Schork Report, gasoline prices, as a percentage of consumer spending, are entering a dangerous area.

As of November (the latest month for which data is available) personal consumption expenditure (PCE) on energy (primarily gasoline) is up to 3.82. That is the highest high (by far) since the implosion of the 2008 bubble. The problem now is, with Brent crude oil trading comfortably above $100 a barrel, the recent relationship to retail gasoline in the U.S. translates into greater than $3.40 at the pump for the consumer, which then translates into a PCE on energy of around 4.15.

That is a value we have not seen since the summer of 2008… and we all know how that turned out for oil bulls.

* Footnote from Stephen Schork:

Please keep in mind, should is the mostly dangerous helping verb in the English language.


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.