Retail fuel prices will move above $2.70 gal this week, and perhaps even flirt with $2.75 gal by Easter Sunday. But evidence is mounting that we are in the last throes of this high price insurgency. Of course, that sort of temperate prediction won’t get much attention with the press intent on showing the few rogue $4.00 gal gasoline prices that adorn pumps in some affluent California suburbs, and Iran could muck up the most reasonable predictions.
Prices begin April in rarified air. Today finds a $2.685 gal national average for regular unleaded and premium gasoline is less than a nickel from that magical $3.00 gal mark. Values are some 23cts gal higher than they were when March began, and about 12cts gal above prices on the same day of 2006. But remember: April 2006 brought some of the most intense updrafts of this decade. We are not likely to match those increases and gasoline could be cheaper on a year-to-year basis within weeks.
Let’s pull back and take a wider view of the calendar quarter that has just concluded. It lived up to the “bipolar” characterization that is typical of 21st century markets, with street prices bottoming out at $2.143 gal (1/19/2007) and topping out at the $2.659 gal mark reached on March 31. The entire quarter saw an average price of $2.3424 gal, not far off of the $2.3368 gal average in 2006. Despite the slow start, it did indeed represent the highest first quarter retail average on record.
That record 2007 price compares with a retail average of $1.92 gal in first quarter 2005; $1.65 gal in 2004; $1.589 gal in 2003; and $1.167 gal in 2002.
I clearly do not believe that the second quarter of 2007 will break previous records. So, despite all of the rhetoric and concern, the next three months will see consumers have a wee bit more spending power than they had in 2006, at least for the fuel portion of their budgets.
Speaking of the quarter, who were the big winners? One need not hedge this answer - - refiners were the beneficiaries of gasoline’s launch. Here’s a quick perspective.
Five years ago, in the first quarter of 2002, refiners could expect to process sweet crude (WTI, as represented by the NYMEX futures’ price) and make about $5.68 bbl on the gasoline output. They only made about $2.47 bbl on the distillate (heating oil, diesel, etc.) cut during that period.
That gasoline margin widened to $7.28 bbl in 2003; and surged to $8.97 bbl in 2004 before easing slightly in the 2005 and 2006 winters. But this year’s performance has been nothing short of sensational for refiners. Gasoline in the first quarter (actually RBOB, the blendstock to which ethanol must be added) fetched nearly $13 bbl above the price of crude. And if that wasn’t enough to put a renaissance label on the refining sector, the other part of the barrel had a huge return as well. Refiners could expect to sell their heating oil or diesel for at least $11.63 bbl more than crude, and the quality low sulfur products fetched more than $15 bbl in margin during the quarter.
The biggest losers were the gasoline retailers. The year began with a sweet spot where fuel marketers could expect to gather gross margins of 20-25cts gal, but by late March, many chains were selling retail gasoline for just pennies above cost.
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I’d like to move away from exclusively talking about price and discuss an event last week that was overshadowed by Iran, refinery issues, and rising pump values. I’m reprinting below a commentary written for the OPIS newsletter readers. Essentially, the story notes that we may now be just the “click” of a mouse button away from a sharp rise or fall in oil prices at any given moment.
OIL MARKETS RAPIDLY TAKE AIM ON VIRTUAL SPACE
Much will be written about last week’s oil price rise and the new seven month highs for crude and some refined products. But the most significant aspect of last week’s volatility came in seven frantic minutes on Tuesday afternoon.
Imagine the Dow Jones Industrial Average moving up (or down) by nearly eight percent in such a small space of time. It would equate to a move of about 1300 points.
That’s an unlikely occurrence in equities, but it’s precisely what occurred for crude oil last Tuesday. The move, and the subsequent analysis of its root causes, represents a wake-up call for everyone in the supply chain who has ignored the shift, and consequences, of electronic trading. The message: dramatic changes in a window nearly 24 hours wide may not be a “fluke” heading forward.
Crude oil settled in the Tuesday NYMEX pit session below $63 bbl, but rose to $68.09 bbl in some very active Globex electronic trading for NYMEX WTI futures just before some East Coast 9-5 offices were closing. There was considerable volume for the initial part of the spike, with several million bbl (thousands of contracts) of WTI changing hands. Commercial oil traders, and many of the new financial players, were generally dumbfounded by the advance. Pundits grasped at straws, blaming saber-rattling with Iran, mistaken market orders, or bulk buying by a major investment bank. None of those straws could be confirmed.
What triggered the move was less important than the move itself. More than 80 percent of the NYMEX energy trading is now conducted in ultimate anonymity - - through the Globex platform that can be utilized via PC’s all over the world. All of the trading for the rival InterContinentalExchange is electronic. The entire complex of bourses was described by one veteran futures’ broker as “a great big massive new video game”.
The Tuesday spike illuminates the risk that suppliers and marketers need to recognize as oil trading and oil prices grab more of the global financial limelight. The spike occurred as many refining and marketing execs were in afternoon meetings, a remnant of the “old days” when the NYMEX settled at 2:30 P.M. and prices could be set, and the next day’s sales or liftings could be planned. To some extent, the “in the dark” status of R&M execs confirmed my own sense that the majority of meetings are nearly always counterproductive.
At this date, the gravitation to electronic trading hasn’t had a major impact on gasoline, diesel and heating oil pricing. But that may change. Conversations among well-heeled refining companies as well as low margin wholesale peddlers have been stirred. The consequences of after hours’ global price gains (or losses) of 5-15cts gal has resonance in a community where tenths of a cent/gal still have crucial significance.
So far, there has been no move toward effecting more frequent downstream price changes, but a few more afternoons like that on Tuesday March 27 could provoke new systems and a new paradigm.
Oil hasn’t moved to a 24/7 format, but it’s getting closer. And there’s irony in the move. Oil marketers who formerly regarded NYMEX floor brokers, or locals, as fast talking “street hustlers” may rue the transition to the electronic space.