Three U.S. states—-Michigan, Missouri, and Oklahoma—now have average prices for gasoline of less than $2.00 gal and I expect that about a dozen states will be in that camp within the next week. We’ll see Indiana, Ohio, Arkansas, Georgia, Iowa, Kansas, Kentucky, Minnesota, South Carolina and Tennessee slip below $2.00 gal within days. Perhaps 20 more states will find at least the aggressive chains beneath this magical number, although averages will be slightly higher. For details, visit our compilation of numbers for AAA at www.fuelgaugereport.com
But let me interrupt my play-by-play of the retail gasoline score with a mea culpa on crude. I fully expected that crude oil would start the year on a very sloppy note, but I didn’t foresee that it would be downright slovenly.
I wrote in December that we would probably see $70 bbl before we witnessed $50 bbl for 2007 crude futures, but we briefly hit $49.90 bbl yesterday. So, I was wrong.
But I still suspect that we are very close to the low water mark for the first eight months of the year. However, we will see some further action below this $50 bbl mark in the days ahead. Accordingly, I’m adjusting my forecast for crude to this extent: I’ll keep the high end target at some $70-$72 bbl for West Texas Intermediate crude, but the low end could clearly see $47.50-50 bbl within days. Hence, as golfers would say, I am taking a “mulligan” on my original December forecast rendered in December.
Let’s look at the OPIS Oilmanac Tape for today:
The average price for retail unleaded gasoline today is $2.196 gal, down 12cts gal in one month and off by about the same amount (12cts gal) from last year. Based on data from the Energy Information Administration (EIA) we are using about 380.5-million gal per day, so the daily bill works out to $836-million.
Last year, we spent $859-million on the same day, and in 2005, the bill was $678-million. If you go back to January 19, 2002, Americans were outlaying only $383-million per day.
We’re on a trajectory where we’ll be paying about $100-million less than a year ago, but the greater perspective still shows a hefty bill when the last four years are thrown out of the mix. Keep that in mind as the Wall Street stock touts talk about the surge in American’s disposable income that will drive the stocks they recommend higher. Let the buyer beware.
One footnote on these numbers: When wholesale prices crash (they are down some 30-60cts gal since December 20 in various parts of the country), you will see much greater distance between market low’s and high’s. Those first stations to hit $1.99 gal on the street are grabbing market share from sites posting prices some 10-20cts gal higher. We’ll see many of the high prices move closer to the leading edge in the next few weeks, regardless of what happens on the futures markets.
A Summary of This Week’s Global Markets
Oil prices continued to find no real support in the financial community or within the commercial trade this week. WTI futures already have spent some moments below $50 bbl, a number that has magical resonance with the public but less significance with oil refiners and producers.
Once again, the collective sentiment among futures traders remains clearly bearish. The market ignored healthy economic data, as well as the reiteration by some large investment banks that $60-$70 bbl remains a reasonable 2007 “average” target for WTI. On the refined products’ side, a fire at a Chevron California refinery and an overseas blaze at a huge Kuwaiti plant both had little impact on price. Some normal Winter temperatures couldn’t help undo the damage to heating fuels by some 45 days of warmer-than-usual temperatures.
There are, however, the first signs that a reversal may be near, and those signs pop up on the gasoline front.
New futures speculators may not be aware of the purge-and-binge cycle that has been characteristic of nearly every winter for the past ten years. Gasoline always falls apart during the weeks where its Reid Vapor Pressure (RVP) specification can be as high as 13.5-15.0 psi. Like the Oscars and Golden Globes, this event (the winter purge) gets moved up on the calendar every year.
Just take a look at what happened in the Chicago gasoline market last week. Sellers outnumbered buyers by a wide margin and conventional gasoline was sold for 24cts gal under benchmark NYMEX RBOB. That put the spot wholesale price at $1.13 gal, or about $47 bbl. At the same time, WTI crude futures were pegged at $51 bbl, so gasoline was trading for $4 bbl under the price of sweet crude.
A 13cts gal rebound ensued, pushing Chicago gasoline to about $1.25 gal, or some $52.50 bbl, even as crude moved in the other direction. No successful business can purchase raw goods for $50 bbl and sell the finished product for $47 bbl, so it was clear that something was amiss.
Market-timers are reluctant to pick a bottom, but many physical traders sense that the first soundings for a typical Winter gasoline bottom have been rendered. There is clearly too much Winter gasoline, but that statement could have been made in virtually every winter since the early 90’s. The first Summer blends of gasoline begin shipping in less than three weeks on the West Coast, and they’ll start trading at the Gulf Coast in March.
In the meantime, expect to see the story of “tumbling gasoline” many times over in your local and network news. Media saturation of a dramatic oil market move has been the tipoff of a trend change many times before, so be aware.