Schork Oil Outlook: Headlines, Not Demand, Driving Fuel Costs

In response to special questions, dealers reported some increase in the use of leverage over the prior six months by traditionally unlevered investors--in particular, asset managers, insurance companies, and pension funds. In addition, dealers reported an increase in leverage over the past six months by hedge funds that pursue a variety of investment strategies.
- Federal Reserve Board, FOMC Minutes
April 07th Release

That bears repeating… traditionally unlevered investors are levering up, as are hedge funds, to “… pursue a variety of investment strategies.” Hmm, we wonder what those investment “strategies” include.

We put strategies in quotation marks because pouring other people’s money into the energy market based on headlines, rather than demand functions, does not require much strategizing. To this effect, implied demand for gasoline has dropped 3.7% over the last four weeks. That is one of the largest four-week declines (first quartile) of the last twenty years.

Refinery throughput in PADD I (east coast) has dropped by one-fifth over the last two weeks, yet total gasoline stocks are 55.6 MMbbls as of last Friday (which is smack in the middle of the seasonal range). Keep in mind, speculators (or in the parlance of the Fed… traditionally unlevered investors) own 10% more paper barrels of gasoline on the NYMEX than there are physical barrels along the eastern seaboard.

On this note, Sunoco is re-starting an FCC at its Girard Point (Philadelphia) facility after an unscheduled outage. PBF Energy Partners will re-start an FCC at its Paulsboro (NJ) refinery and the company expects to re-start the 190 Mbbl/d Delaware City refinery (shuttered since November 2009) this month.

Most importantly, imports of gasoline blending stocks into PADD I have doubled over the last two weeks. That is a good signal that Sunoco, PBF et al. are getting ready to ramp up output. That is interesting given that the east coast mogas crack for June (Nymex RBOB / ICE Brent) is yielding only around 10%, i.e. less than half the five-year average.

Finally, China’s National Development and Reform Commission (NRDC) is raising retail fuels costs. Effective today, gasoline and jet fuel prices will rise by 500 yuan (?$76) a metric ton and diesel will rise by 400 yuan (?$61) a ton.

As analyzed in today’s issue of The Schork Report , consumer demand destruction for petroleum products in the West and East is essentially guaranteed at this point.

Yet, Wall Street shrugs.


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.