At some point in the next few days, and quite possibly before major league baseball resumes its season, average U.S. gasoline prices will surpass $3.00 gal. But the 2007 midsummer rally now in progress differs from previous versions in that the high prices are radiating outward from the center of the country. Historically, most gasoline spikes have commenced at the coasts and moved inward.
Crude oil prices just hit new 2007 highs with U.S. domestic WTI (West Texas Intermediate) futures trading at nearly $73 bbl, while the global benchmark (Brent North Sea Crude) spent some time above $76 barrel. But crude is not what is driving U.S. gasoline prices higher - - domestic inventories are as high as they’ve been since 1993. Wholesale gasoline prices - - which from 1980 through 2002 rarely traded for as much as $10 barrel over the price of crude - - -are instead in the neighborhood of $100-$116 barrel or $30-$40 barrel above crude. . It is truly wonderful to be a domestic U.S. refinery these days.
This July wholesale price spike began with the loss of the 107,000 barrel per day refinery in Coffeyville, Kansas, but it clearly accelerated this week. Prices for wholesale gasoline(exclusive of taxes and transportation) are generally now at $2.75 gal or higher in heartland states. The average state, federal, and local tax burden is about 45cts gal. So, that means that the cost of putting gasoline into a U.S. station in these states - - before any profit mark-up is added - - is around $3.20 gal.
That’s why it’s currently so easy to forecast that retail gasoline prices will advance to $3.25-$3.50 gal. It’s not clairvoyance on my part - - it’s simple arithmetic.
As of the close of business Tuesday, half of U.S. states saw average prices of above $3.00 gal and that number will swell by the weekend. See www.fuelgaugereport.com for details.
Places like Kansas City, Chicago, Cleveland, Detroit, and Milwaukee will almost certainly see prices in the $3.25-$3.50 gal range by Bastille Day. If you live near a city that is in the Central Division for major league baseball, you will pay more for your fuel than your counterparts in New York, Boston, Los Angeles, San Francisco, or Seattle. That is truly a 21st century oddity.
Where we go from here may depend greatly on the nature of weekly Department of Energy data due to be released at 10:30 EDT Wednesday. The statistical bulletin will probably show a reduction in refinery runs, which may translate into lower U.S. gasoline production. The East Coast finds the cheapest gasoline in the country thanks to the daily onslaught of more than one million barrels of foreign-sourced gasoline, mostly from Europe.
But fundamentals alone don’t explain why crude oil prices and pump prices are four or five times higher than they were in 1998. Note: I use 1998 as a reference point since that year was the last time that U.S. crude oil inventories were as high as 355-million barrels (we hit the 360-million barrel level last week).
Futures contracts for oil, traded mostly on the N.Y. Mercantile Exchange (NYMEX) and the InterContinentalExchange (ICE) are quite possibly the hottest asset class of this decade. The amount of money that is invested in commodities like crude oil, gasoline blendstock, heating oil, and natural gas is mind boggling. It’s my opinion that the speculative fabric of the oil futures market has swelled exponentially. It’s not a collusive action; it’s the collusion of “like thinking.”
Consider the following story that ran in OPIS today that I have paraphrased for the petroleum layman:
LONG SPECULATORS BET BIGGER ON CRUDE HIKE; RECORD BIAS WITNESSED
High rollers in the futures market have nearly doubled down their bets on crude oil price appreciation. The high rollers show up in the Commodities Futures’ Trading Commission (CFTC) data that requires entities holding large positions to report those positions to regulators (editor’s note: this is essentially a means of insuring that no single bank, investment firm, or evil entity “corners” a commodities market)
When the total positions of large speculators betting on lower crude prices are subtracted from the similar aggregate position of large speculators betting on higher crude prices, the result is a net long position that is close to 100-million barrels. (editor’s note: that’s more crude oil than the U.S. imports from Nigeria, our favorite global hot spot, in a calendar quarter).
I’ll spare readers the rest of the details on why there is such a bullish bias, and why there is so much of a bullish consensus among the investment banks, hedge funds, commodities funds, and even pension funds that currently find comfort in holding paper contracts that will appreciate in value if oil rises.
Meanwhile, the amount of money that is bet on gasoline futures appreciating isn’t as staggering in scale, but large speculators betting on higher gasoline futures’ prices outnumber those betting on lower prices by a ratio of about five-to-one.
I want to emphasize that all of this is above board, and this speculation occurs largely outside the realm of actual energy producers or refiners. But anyone who believes that this bias is not a cornerstone of $70 barrel crude and $100 barrel gasoline (or $3.00 plus retail prices)has not paid attention to the phenomenal growth in the oil-as-asset-class world of the 21st century.
The most performance-enhancing drug in the financial world is money. That money has poured into new speculation in oil, and gasoline, and heating oil.
Whether it turns out to be smart money is a story for another day.