You’ve no doubt seen the constant cheerleaders on business television or heard them on financial radio programs. The U.S. economy is going gangbusters, they say, thanks to the unexpected “dividend” to consumers in the form of cheaper 2007 oil prices.
Well, guess what? It took nearly 40 days, but today, we saw the wholesale prices for gasoline, diesel, and heating oil finally surpass year ago levels in nearly every section of the country. Crude oil, the glamour product on Wall Street, still trails same day-last year quotes by about $2.50 bbl, but that deficit was in double digits for most of January. Retail gasoline, the marquee product on Main Street, still trails last year by about 12cts gal.
Economics professors will generally agree that higher wholesale prices lead to higher retail prices. Hence, I need not invoke the memory of Nostradamus to calculate that street prices for gasoline and diesel fuel are headed higher in the next ten days.
And remember those reporter rants about gasoline retailers profiteering as oil prices plummeted? Well, there have been a couple of bankruptcies for C-store chains in the last 50 days, and the present environment is incredibly hostile for businesses that depend on a gasoline profit. Costs are up 20-25cts gal in three weeks, and the street has moved at a glacial pace.
One rule of thumb that has held true, however, is that refiners’ largesse is inversely proportional to the misery of retail chains that don’t manufacture their own fuel. (Most gasoline stations are not company-operated, so most operators need to depend on the margin between wholesale and retail).
Note: for a comprehensive view of 2007 refinery consolidation, visit http://www.opisnet.com/press/releases.asp for the exclusive scoop.
Refiners are seeing splendid standards by even the most contemporary historical standards. The renaissance that began in 2003 is now once again in full bloom. Winter gasoline futures today flirted with $1.60 gal, about $7.50 bbl above sweet crude. A year ago, that gasoline margin for refiners was a relatively modest $2.50 bbl. Cash heating oil prices finally pulled even to NYMEX futures, and the $1.7225 gal presstime quote was more than $12.50 bbl above WTI crude. A year ago, the heating oil margin (what’s known as the “crack”) was $7.33 bbl. That level would have been described as robust, or even excessive in the last ten years.
Most traditional analysts and financial journalists are compelled to attribute the strong recovery in 2007 oil prices to Mother Nature. The middle third of the winter has indeed delivered more fuel-hospitable weather than the first third. Brutal cold has helped the heating fuels, but there’s been little snow and ice to impede travel, and that’s helped gasoline and diesel offtake.
But most of the recovery should more correctly be tied to human nature. The maddening crowd of futures’ traders has probably overreacted to Department of Energy statistics that merit closer inspection. This is particularly the case for gasoline.
Gasoline demand as measured by the Department of Energy is up nearly 4 percent from last year, the statistics suggest. That’s an unheard of year-on-year “lift” that would almost certainly create havoc if maintained through March and April. Actually, a 2 percent lift would be regarded as brisk, so the statistics (estimating gasoline demand for the last four weeks) beg for some further examination.
This reporter talked to about a dozen large retail chains and found that the view from the field was much different from the statistical picture so far. Gasoline demand is no doubt higher than last year, but our sentinels on the street suggest that demand is higher by a much more modest 1-percent to 1.5-percent versus last year. That is much more typical of 21st century demand patterns. Almost all of the growth is coming from Big Box and high volume “New Era” sites that sell gasoline at prices barely above cost.
It’s still probably too early for gasoline prices to assume their typical Spring trajectory. Today’s futures action saw nickel plus gains in gasoline and heating oil, and it was variously attributed to the weather, a small but significant crude oil disruption in California, and some lingering refinery problems at the U.S. Gulf Coast.
But these analysts miss the main point. The oil futures market generates its own physics and has grown to where it has its own ecosystem. The action in the last twenty minutes of trading Thursday was as manic as an astronaut in mating season. But to conclude that this movement was in response to news is to get the story backward. The market, and the incredible swings it has taken almost every day in 2007, is really the news.
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Note: Last week, I had the pleasure of addressing renewable fuels’ producers at the National Biodiesel Conference in San Antonio. I was impressed with the number of investors, marketers, producers, and traders that attended the meeting--some estimates put the crowd at some 3500-4000 people.
I won’t weigh in on the politics of renewable fuels and the antagonists. The battles between agricultural lobbyists and petroleum interests make Donald & Rosie look like Paul Newman and Joanne Woodward. (I do believe that Donald Trump may favor the Agricultural lobby, however, since that may be switchgrass on the top of his head).
While the size of the meeting evoked thoughts that suggests the industry is prosperous, the truth is that a huge upwelling in the price of agricultural products has pinched margins, whether one peddles B2, B5, B10, B20 or whatever grade of diesel (the “B” designates the bio component of the finished fuel).
I was surprised that these agricultural commodities see the same “disconnect” between traditional fundamentals and current prices. The fundamentals don’t necessarily support sky high prices, but investors have pumped huge sums of money into these commodities, just as they have rushed in to buy oil.
Ultimately, this means that the nation could face “food inflation” as well as “energy price inflation” as long as this trend continues. It begs the question: will the money interests be the target of blame if gasoline, corn, soybeans, and meat cost more because of this money flow?