PUMP PRICES TARGET LOWEST NUMBERS IN THIRTEEN MONTHS
We now almost certainly will see U.S. nationwide gasoline prices sink below what has stood as the low water mark for about thirteen months, and there’s a chance, that many areas will see fuel prices match numbers not witnessed since June 2005.
I wouldn’t be surprised to see a huge swath of the country with sub-$2.00 gal prices by next week. If you are a “snowbird” driving from a northern state to Florida, you will find prices not available since The Donald and Rosie were on speaking terms.
Gasoline prices this morning are barely above $2.28 gal nationally, and that number is headed sharply lower. We’ll definitely get below $2.12 gal, which we haven’t done as a country since December 4, 2005. There’s an outside chance that we could approach $2.00 gal or less - -I’m not betting on it, but I’ve learned to never underestimate the oil market’s penchant for excess, regardless of what way the arrow is pointing.
That’s the skinny of this latest volatile move. But you will hear much more dramatic - - and quite possibly careless - - predictions from others. Here are some “high def” thoughts on the matter:
Crisis of Confidence . . . . are we headed to $30-$40 bbl crude?
Crude oil today closed at its lowest price since June 1, 2005 with West Texas Intermediate (WTI) settling at $51.88 bbl.
Within the oil patch, executives are asking themselves: are oil prices on the brink of a great unraveling that will bring a return to crude oil values in the $30’s and $40’s?
Let’s put this decline into perspective. Nearly 20 percent of the oil market’s value has been trimmed in less than three weeks. Inventories of crude oil in the nation’s Strategic Petroleum Reserve are worth about $8-billion less than what that that oil was worth on Christmas Eve. The collective working crude and products’ inventory in the U.S. is down by a similar number. There are countless cases where a 25,000 bbl piece of oil put into a U.S. pipeline has lost $250,000 or more in value en route to its destination.
All of this has occurred against the backdrop of tremendous volume. NYMEX and ICE futures’ screens saw numbers change like the progressive slots on the Vegas Strip, and much more is being wagered. Records were broken nearly every day on the exchanges this week, with well over 1-billion bbl traded in each of several sessions.
We can’t help but be impressed, however, with the orderly nature of the retreat. There were no panic closings of the markets, no notices of force majeure, and no rumors of trading shops about to close. Almost any energy product that can be burned has lost ground on each and every business day of 2007, but we’ve seen this play out before. Tragedy turns to comedy in this business and vice versa and it does so in the blink of an eye.
All sorts of “bullish” news was ignored, as is typical when sentiment shifts toward an extreme. The OPEC rhetoric and the recent track record for crude point to more resolve toward a production cut next month. The troop surge in Iraq rules out any significant new production from that part of the world in 2007. President Hugo Chavez has taken the helm of Venezuela for another six year term, and he clearly wants to wrestle more control and revenue from multi-national oil producers.
Gasoline demand in the first week of the year represented the highest Week One level in our history. Distillate demand is poor, but that’s to be expected against the backdrop of a winter which has so far delivered weather that’s nearly 20 percent above normal in some parts of the country.
Catalysts & Emetics . .. .
Degree days are usually the catalyst, along with refinery downtime, that drives prices higher in January and February. The catalyst has turned into an emetic agent this year, purging much of the excess that was clearly built in to prices and expectations. It’s hard to spot any replacement catalyst that will surface in the next few weeks.
There is the temptation to compare this downturn to the great unraveling of NASDAQ stocks that followed the excesses of 2000. In fairness, there are some similarities, but there are tremendous differences as well. This pricing slump may bear more resemblance to the U.S. housing market, where slumps happen but never give way to the numbers witnessed two or three or five years ago.
Some Points about Supply & Demand
DOE data published this week implies that refiners may have no choice but to cut distillate (heating oil and diesel) output, even though the bulk markets are rewarding them with margins well above historical levels.
High margins, plentiful imports, and a record warm Winter have all combined to send most cuts of distillate to lofty levels. Strangely, the market hasn’t yet acknowledged the containment problems that are witnessed in distribution, with heating oil still fetching margins some $7-$10 bbl above crude, with on-road diesel commanding an additional $3-4 bbl more.
Wednesday’s data points to problems in placing some of the January distillate output, particularly if imports remain high.
Gasoline stocks rose by a very high 3.8-million bbl, but demand was a record for the first week of any January at 9.2-million b/d. The problem for motor fuel is that demand will almost certainly sink below 9-million b/d for several January and February weeks. With refiners running nearly 16-million b/d of crude and feedstock, and with gasoline imports still above one million b/d, that points to more inventory builds in the next few reports.
That may explain why there is no particular concern with the drop in crude oil stocks. Inventories of crude fell by 5-million b/d, and imports dropped by about 500,000 b/d, but no alarm bells are being sounded. Some refiners may look to advance February or March maintenance to January, so as not to make some light products that can’t be stored, and there are almost certainly run cuts forthcoming in the next six weeks.
On a four week average basis, gasoline demand is up 0.8 percent from last year. That corresponds closely to the one percent or so “lift” described by many chain retailers, and is consistent with a growing economy. But if this one percent lift is maintained, weekly demand will still sink below 9-million b/d this month.
The West Coast, which has the inventory system that is most susceptible to tightness, did see a stock buildup of 900,000 bbl in gasoline this week. But despite higher runs, refiners there made about 76,000 b/d less gasoline than in the previous week. This is still the region that is most likely to see a gasoline rally this quarter.
Some Thoughts on the Volume Explosion . . .
Oil futures’ growth has exploded in the first few weeks of 2007, and the two competing formal exchanges - - the NYMEX and ICE - - are now seeing daily volumes for crude that are some fifteen times the rough estimate of one day’s global supply.
Both the New York Mercantile Exchange, and the InterContinentalExchange, issued what amounted to dueling press releases yesterday, and neither announcement is likely to get much space in electronic or print media. Instead, the collective eyes of the global financial community are focused on the ongoing price tailspin for oil, with crude down about 18 percent from its pre-Christmas trading levels.
But the volume expansion on these exchanges has been stunning and speaks to the incredible growth in financial participation in oil futures - - whether from banks, hedge funds, equities strategists, and trading companies.
Example: For the first time ever, the NYMEX traded over 2-million futures’ contracts in a single day Tuesday, blowing away all previous records. Some of the exchange volumes came in metals, but the lion’s share of action is in energy futures, particularly for crude oil and natural gas.
NYMEX traded 657,549 contracts for WTI crude, representing some 657.5-million bbl of the light sweet grade. The InterContinentalExchange, which didn’t even have a WTI contract until last Winter, itself boasted a record January 9 volume of over 300,000 WTI contracts.
ICE also traded about 337,000 Brent futures contracts on Tuesday.
When all of the crude trades are added up, on NYMEX and ICE, Tuesday saw about 1.3-million contracts exchange hands, representing about 1.3-billion bbl. That compares with world oil demand forecast to be about 86.2-million b/d in the first quarter of 2007, according to the Energy Information Administration (EIA). The arithmetic adds up to a tidy multiple - - about fifteen times as much crude is trading each day than is required on the planet, and the trend indicates that multiple will swell further this year.
The vast majority of the growth has come in the electronic space, with both exchanges seeing much greater financial participation. All of the trades on the ICE platform take place via computer - - there is no open outcry floor for that Exchange. Meanwhile, NYMEX partnership with the Chicago Mercantile Exchange’s Globex platform is leaving floor action in the dust. In sessions witnessed for WTI this week, as much as 90 percent of the volume in the front month for crude has been via the Globex electronic means. Floor brokers are still doing a majority of back end months, calendars swaps, and still dominate the options’ market.
The success of Globex may make the move toward an earlier opening for the pit session somewhat meaningless. NYMEX crude and products’ futures are now seeing heavy action in the early morning hours that precede the 10 o’clock starting time for the pits in New York. Beginning February 1, all open outcry sessions for energy will open at 9:00 A.M. EST. But most of the upstream and downstream oil participants say that the earlier time isn’t even needed, given the explosion of action on the Globex electronic platform.