The nationwide retail pump price for gasoline hit $2.325 gal today, the highest price so far in 2007. I will go out on a limb here and predict that today’s number should be the high water mark for most of January. But please don’t get excited and buy that new Hummer, Sequoia, or Popemobile (my name for one of my editor’s vehicles, which is officially known as a “Dodge Ram 1500 Cab”).
The oil markets don’t behave like the stock market. The first few weeks’ action for crude oil, or for gasoline, do not represent a template for the balance of the year.
My dad taught me to love the sport of kings -- horse racing -- even though in his case, it represented the sport of postal workers. At the pony track, I love the way the mega-rich mix with the working class and all segments in between. But most of all, I love the colorful metaphors that can be picked like Preakness daisies and applied to discussions of politics, other sports, and in this case, economics. And needless to say, the stables are loaded with all things scatological that can be applied to much of what passes for analysis in the 21st century.
All of the signs in the last 40 days pointed to a sloppy track for oil markets in early 2007. Instinct told me that there would be little traction for an early rally. I have confidence that gasoline will behave like a thoroughbred as the prep races for the Kentucky Derby approach, but the market could be more like a quarterhorse or even a mule in January. I have no idea whether it will end 2007, performing like Secretariat, or Mr. Ed. Both are possible. Anyone who denies that smells of the stable.
The track is sloppy because demand for gasoline is generally awful in January, and eventually, the teeming millions have to use up their gift cards and stay away from the malls. Also, how many red-blooded American males, like yours truly, are spending more time at home so they can see the world in that new big screen Hi-Def TV? I am clearly driving less, and watching football more.
January is usually a terrific demand month for the other segments of the petroleum barrel -- fuels like heating oil, kerosene, and even diesel fuel fly out of petroleum terminals in midwinter. But this Winter is like no other -- one can enter a zip code in the WeatherChannel Ten day search engine for northeastern cities and find no hint of typical January temperatures ahead. Prices for these “winter fuels” have plunged by 15-25cts gal within the bookends of the twelve days of Christmas, with two days to go. Oil prices may dip further still in the immediate future -- winter fuels are the “sherpa” that takes crude toward the summit or away from it in January and February.
What irks me is that all of this was so ridiculously predictable. I’ll digress.
This Sunday is the twelfth night of Christmas, which brings with it the festival of the Epiphany. The secular meaning of that Magi-inspired term is as follows: one has an epiphany when one finds sudden insight into the reality or essential meaning of something, and that insight is usually prompted by observation of every day occurrences.
How appropriate then, less than 48 hours before the Christian festival, that oil traders collectively had a 2007 epiphany. The market belatedly recognized that January would be a rugged month for transportation fuel (as it usually is) and concluded that record warm weather would extend that hostile environment to heating oil, kerosene, residual oil and other winter fuels.
Let me attach some numbers to the perspective, so one can calculate how global oil markets have performed within the last twelve days or so. Crude oil futures have plunged from $64 bbl just before Christmas to a price today of $55.59 bbl. To put this in context, this would be the equivalent of a 1500 point plunge for the Dow Jones Industrials.
Wholesale gasoline prices on the East Coast have lost about 25cts gal of their Christmas Day value, with similar 15-20cts gal drops in other key bulk markets east of the Rockies. The West Coast still represents the least sloppy track -- wholesale prices for gasoline there are down only about 10-15cts gal in the period, and the price dealers or distributors pay is some 30cts gal or more than the invoiced price for their eastern, Midwestern, and Gulf Coast counterparts.
With wholesale prices some 10-25cts gal lower than they were when eggnog prices were at a premium, one doesn’t have to be Nostradamus to see lower pump prices ahead. But we’ll spend the next 15-50 days searching not for a point of stasis, but for a launching pad.
A Quick Note About Heating Oil
Heating oil futures closed just over $1.54 gal today. As recently as midsummer, the wholesale price for Winter 2006/2007 heating oil was above $2.25 gal.
If you were to gather together a group of northeastern heating oil consumers, you would find more diversity in the retail prices paid than perhaps anywhere but the ticket counter at an airport.
A lot of heating oil retailers typically lock in their wholesale prices in the Summer, and they are stuck with costs in the $2.00-$2.25 gal range. Retail margins for full service heating oil retailers (those that offer burner service, etc.) are typically close to 60cts gal, so those forward thinking marketers might be charging their customers $2.60-$2.85 gal just to cover their normal operating costs and margin.
This is happening now, across the northeast, and as it occurs, I think of the Woody Allen line that parodied the Ant & Grasshopper fable (something like ... the Grasshopper had no food, the Ant had food all Winter ... but the Ant also had chest pains ... )
On the other hand, the heating oil companies who did nothing -- calculating that oil was just too expensive to pre-buy at such high numbers -- can now take advantage of wholesale costs that have plunged to about $1.55 gal. The heating oil peddlers who advertise via C.O.D. ads in newspapers and the like, can operate on margins as thin as 20-40cts gal. So, you might look in your local newspaper and see heating oil offered for sale as much as 80-95cts gal less than what your neighbor might be paying.
Of course, both types of marketers would say they are disadvantaged, and indeed they are. The typical northeastern home might use 1000 to 1200 gal of heating oil in the Autumn and Winter, but this season is on course to deliver something far short of that target range.
But the bottom line is that the heating oil customer on 1312 Mockingbird Lane may be paying $2.50 gal for his January 2007 oil, and the neighbor at 1313 Mockingbird Lane could be paying $1.99 gal, and both are getting a “fair” price.
The Current State of Supply: We Interrupt this “Refining Renaissance” ...
Today, the Energy Information Administration (EIA) arm of the Department of Energy released its latest weekly statistical bulletin on oil supply, production, and demand. I’ll excerpt some observations that I made for OPIS and Oil Express readers.
- Gasoline demand remained brisk at 9.247-million bbl per day (about 388-million gal) but U.S. refiners are running about 700,000 bbl per day more crude than they did a year ago (plenty of Gulf Coast production knocked out by Katrina was still down as January 2006 beckoned).
- Very plentiful foreign imports (the U.S. has the highest wholesale prices in the world ... but far lower retail prices than many countries) accounted for about 14 percent of our motor fuel needs.
- Gasoline inventories built by 5.6-million bbl, which for those of you who don’t normally keep score, is a colossal stock climb. More inventory accumulation should take place in January, and hence, prices on a near term basis could be under pressure. Gasoline demand will almost certainly drop to about 8.8-million to 9-million b/d, and with high production and imports, we’ll be using less gasoline than is being brought to market.
- Demand for the middle of the barrel - - heating oil and other “distillates” - - dropped quite a bit. When it’s 60 degrees in New York City in January, the amount of oil used by a homeowner might be a third of normal. We expect more inventory builds in the next couple of government reports.