I undeservedly get attention as a “gasoline price guru”. There are two secrets for that notoriety. It is bestowed on me first and foremost because I have good TV “hair” for a gentleman who has passed the half century mark. But secondly, and more importantly, I watch wholesale oil prices daily, and that gives me a leg up on where retail prices are headed.
Wholesale prices for gasoline are up anywhere from 31 percent to nearly 50 percent in the last 30 days. I’m not sure when the next Producer Price Index gets released, but trust me on this issue: we’ve seen a huge rebound in oil prices, particularly for gasoline.
Below is a short table that I’ve put together based on OPIS assessments of the big bulk markets where refiners, banks, trading companies, and speculators bet (or manage risk) on the price of oil and gasoline. The numbers are quite stunning, and they point to some very stiff price increases at the pump in the coming days and weeks. Retail gasoline is up only 6 percent nationwide during the same period, although there are a few regions where prices have advanced by a more robust 12 percent or so.
Wholesale Oil Price Increases In the Last 30 Days
Market January 22, 2007 Price Current Price (2/22/2007) % Change
WTI Crude $51.13 bbl $60.95 bbl Up 19.2%
NYMEX RBOB $1.375 gal $1.755 gal Up 27.6%
NY Ethanol $2.000 gal $2.350 gal Up 17.5%
NY Reformulated Gas $1.398 gal $1.830 gal Up 31.0%
Gulf Coast Unl Gas $1.332 gal $1.755 gal Up 32.0%
Okla/Kan Unl Gas $1.315 gal $1.800 gal Up 37.0%
Chicago Unl Gas $1.270 gal $1.800 gal Up 41.7%
L.A. Gasoline $1.475 gal $2.200 gal Up 49.0%
PAC NW Gas $1.350 gal $2.010 gal Up 49.0%
I’ve rounded out the numbers as well as the percentages, but you can catch my drift and spot the trend. Wholesale prices are up by more than 70cts gal in some markets (the West Coast is the best example) and retail has barely budged. So, it’s a lay-up to conclude that we are on the cusp of some eye-popping increases at a street near you. If you live on the West Coast, you may get altitude sickness. If you live on the East Coast, you are still looking at “catch-up” increases of 10-20cts gal.
ARE FUTURES MARKETS OVERHEATED, OR IS THERE MORE FROTH AHEAD?
Whenever you have a futures market move more than 25 percent in a month, it begs the question as to whether the market has moved too far and too fast. April gasoline (RBOB) futures are now above $1.80 gal, or about $15 bbl above WTI crude. Most of the rally has been on the back of U.S. refinery problems.
The loss of Valero’s McKee Texas refinery is this week’s catalyst. But one should pause and recognize that McKee represents less than one percent of U.S. refining capacity, and perhaps 0.2 percent of worldwide output.
But 21st century oil markets resemble quantum chaos theory, where a Brazilian butterfly can flap its wings and alter weather throughout the northern hemisphere. And in this case, Valero’s McKee problems are just the most visible evidence of a late Winter struggle to manufacture ample amounts of transportation fuel. In the first few days of 2007, refiners were making about 392-million gal each day of gasoline. DOE recorded U.S. gasoline output last week of just 363-million gal each day, and that frightens marketers who sense that we’ll see plenty of 400-million gal/day usage figures this driving season.
The natural tendency is to get carried away with the chaos. Wholesale price increases of 50-75cts gal bring back memories of 2005-2006 price shocks.
But there are differences in this year’s surge, and they should represent an amber traffic light that ultimately slows what is – at the moment - a runaway market.
For one thing, actual consumer demand figures for gasoline are highly questionable. DOE stats suggest that offtake is up nearly 4 percent from the same four week period a year ago, but our sentinels at retail beg to differ. They continue to portray a retail landscape where real demand is up perhaps 1-percent or so.
Secondly, there have been huge slugs of gasoline put away in storage for sale into superheated Spring futures’ months. The structure of the market (with forward prices well above present numbers for barge loads or pipeline parcels) rewards trading companies that store product until say April. It’s not hoarding; it’s capitalism, and it’s happening not just in the U.S. but abroad as well.
There’s certainly no lack of motivation for refiners. Spot prices for March gasoline flirted with $15 bbl margins above sweet crude in most east of the Rockies’ markets and they briefly exceeded $30 bbl on the West Coast. A lot of refinery maintenance should be completed in the next 30 days, pushing more product into the market.
There is also the issue of technical symmetry. When spot gasoline futures (RBOB blends) bottomed at $1.335 gal, the people who make their living by charting the likely “chutes and ladders” in the marketplace told me that that a reasonable recovery for futures in a “Bear Market Year” would put futures’ prices at $1.79-$1.80 gal. That target was reached today, and replaced with some new targets in the $1.86-$2.04 gal neighborhood.
So, to paraphrase Yogi Berra, it may be late early this year. Gasoline futures could already be in the middle or late innings of their typical Spring rally.
The exception to this reckoning, however, is the U.S. West Coast. That market has its own unique circumstances, and promises to be a hot spot for runaway rallies through the rest of this decade. The alphabet soup of California gasoline blends raced above $2.20 gal last week, with no real amber light in sight.