American motorists will most commonly pay less than $3.00 gal for their fuel within the next few days or weeks, down from the all time high of $3.227 gal reached just before Memorial Day weekend. That should make an additional $60 million each day available for other purchases like Slim Jims, lip gloss, tanning certificates, body piercings, and $5 cups of boutique coffee.
Only two weeks ago, some observers were wondering: “Is $3.00 gal gas the new $2.00?” perhaps paraphrasing Oprah-specific aging topics like is 50 the new 40? (Trust me, I crossed 50 and it’s not a picnic or cause for celebration, unless you practice geriatric medicine).
June should continue to swoon, or at least lean lower. Two thirds of U.S. states will see average fuel prices dip below $3.00 gal this month, and suddenly quite palatable numbers like $2.75 gal are already showing up in states like New Jersey, South Carolina, Oklahoma, and Missouri.
Today finds the average U.S. price for regular gasoline at $3.066 gal, and back-of-the-envelope arithmetic suggests that today’s aggregate U.S. gasoline bill is $1.226-billion, down from the record $1.253-billion on May 24.
A bit of a history lesson is appropriate. Last year, gasoline futures never saw the typically violent sell-off that has characterized most of the last twenty years. Prices only gave up about 13 percent of their value after their meteoric Spring “petronoia” rally. If the ebb tide lived up to the average of more than twenty years, prices would have receded by 25 percent.
Since late May 2007, gasoline futures have ceded about 13.5 percent of their Spring gains. If they simply match the long term averages, it would point to additional losses of about 20-30cts gal. The lowest June/July gasoline futures’ number seen after last year’s sell-off was $2.115 gal. This morning finds gasoline futures worth about $2.14 gal. If we go below $2.115 gal, all kinds of bells and whistles will go off among people who chart those sort of things for a living.
So keep a close eye on gasoline futures in the next 36 hours. A breach of last year’s summer low would send shudders through the spines of many of the speculators who have pumped and humped record summer gasoline prices as a certainty.
Any test of this key sentimental and historical support level would probably come when the Department of Energy releases its weekly statistical bulletin Wednesday at 10:30 a.m. I believe this report will show a drop in demand, and quite possibly a significant enough drop to inspire some selling pressure.
Speaking of Sentiment: When oil prices fail to rally on bullish news, or fail to sell off on bearish news, one should always take pause. Yesterday’s reporting in Oil Price Information Service (www.opisnet.com) included a flurry of refining difficulties registered over the weekend. We cited problems at Texas City, El Paso, Pt. Arthur, Tyler, and Big Spring, Texas; as well as some incidents in El Segundo, California.
If these news items hit the field a month ago, there would have been a futures and spot price spike of say 5-12cts gal. But prices barely moved yesterday, suggesting that there has been a sentiment shift. Speculators are no longer willing to chase gasoline prices higher, given that unleaded fuel sells for more than $25 bbl above crude, and there are whispers of “demand destruction.” They’ll get their hamstrings stretched in time for a hurricane run, if and when the storms threaten the Gulf later this Summer.
Children of the Corn: Ethanol prices have moved well below $2.00 gal in the Midwest and to under $2.10 gal in some of the coastal markets. The gap between the price of corn and the price of ethanol fuel has never been slimmer in all of the years that we’ve covered the renewable fuel. Brazil is not just exporting Jujitsu specialists to this country for the Ultimate Fighting competition - - they are exporting substantial amounts of ethanol.
It currently makes economic sense to blend gasoline with ethanol even if you don’t factor in the federal subsidy. But marketers remember last Summer when ethanol prices rose to $5-$6 gal and added as much as 20cts gal to the cost of reformulated gasoline blends. They won’t opt to blend ethanol without substantial thought and research.
One final note. The N.Y. Mercantile Exchange announced yesterday that it traded a record 919,900 contracts on its electronic trading system last Thursday. Interestingly, the previous record was on January 11, when we were in the middle of an hellacious selloff in crude and gasoline.
The amount of oil that is getting traded each day is staggering, and it continues to multiply like bacteria in a Petri dish. It’s hardly heating oil season, but futures’ action last Thursday saw more than 84-million bbl worth of heating oil change hands. That probably represents more heating oil than we’ll use between now and October.