First, let me get some pretty stunning numbers out of the way.
The nationwide average price for regular gasoline today is $2.838 gal, some 39cts gal below the record highs achieved on Memorial Day weekend. For details, visit www.fuelgaugereport.com Prices are also some $1.162 gal below the $4.00 gal level that was pronounced as inevitable by various irresponsible pied pipers of punditry who pumped their positions with such pronouncements in May and June.
Prices are heading lower over the short term and I suspect the long term. The intermediate term - - roughly from next week through early September - - is somewhat in doubt.
In the next few days, you will see fuel prices that are commonly 25cts gal below year ago levels. This was the week one year ago that saw the retail high for all of 2006 as the market then was hit with the news that some Alaskan oil might not be able to find its way to market. It was also the week where hurricane experts took a massive mulligan. After warning that the 2006 tropical season might be the most devastating on record, some meteorologists borrowed the catch phrase of Saturday Night Live character Emily Littela and issued press releases which in no uncertain terms suggested “Never Mind.”
Meanwhile, here’s a tidy little back-of-the-envelope data set that gives a quick historical perspective on how 2007 is shaping up when compared to recent history. When we plug in demand estimates and daily prices, it reveals that in the first half of 2007, motorists spent about $181.75-billion on gasoline. That’s not far off of the 2006 level of $180.5-billion. But viewed against a longer time series, there are more noticeable differences. In 2005, we spent about $142-billion for our January-June gasoline needs; in 2004 the number was $121-billion; in 2003 it was $103-billion and in 2002, it was just $96.6-billion.
One might think that OPEC, or U.S. refinery operations, or global demand growth, or even tougher EPA gasoline specifications brought us to these times where crude oil sells for five times what it did in 2002. But if you really want to understand one critical reason why crude traded briefly at $78.77 bbl last week, you need to dig deeper. The answer lies in some stunning data on the internal composition in the energy futures market, and the sea change that has occurred in the last half decade.
The Commodities Futures Trading Commission (CFTC) issues a report every Friday that measures the reportable positions of large speculators. And by large, I mean large. The average whale - - whether it be a hedge fund, index fund, some derivative arm of an investment bank, etc. - - typically holds positions representing millions of barrels of crude oil, or refined products.
The Friday report measures the speculative fabric of the market on the previous Tuesday, so the CFTC data released three days ago is a snapshot of positions on July 31. Reminder: that was the day preceding the spike to over $78.70 bbl for WTI.
That CFTC report showed an all time record bullish bias among the huge speculators. Simply put, when you subtracted the short positions of the big boys (where they bet on lower prices) from the long positions of that same group (where they bet on higher prices), you were left with a net long position of 127,491 contracts. Put another way: the huge speculators had a collective bet on nearly 127.5-million bbl of crude that prices would go higher. Or put in the parlance of Vegas: there was nearly $10-billion more speculative money plunked down on the buy bet than the sell side.
At this point, it doesn’t appear to have been smart money, but one never knows. My point is that investment money, and speculative money, from Wall Street and London, and Tokyo, and Frankfort, and Beijing, et al is what largely drove crude oil prices from $49.90 bbl in late January to $78.77 bbl last week. Analysis of fundamentals, or seasonal patterns, may have guided the money flow, but when money pours into a commodity, higher prices are a self-fulfilling prophecy.
And that’s not to say that the money flow coming in from speculators, investment banks, new hedge funds, etc. is “evil money.” But I wish a financial reporter or two out there would start asking about the impact that the flow of money has had on oil prices in the last five years: take my word for it -- money has much more relevance than Nigeria, or Venezuela, or the Trans-Alaska Pipeline, or even SUV’s.
But reporters don’t ask, and the trading community doesn’t tell. The average citizen still believes that a nefarious cabal of oil refiners, traders, and distributors is responsible for these crazy swings. The steering currents that guide oil prices in the next few months may indeed come from the tropics; but they are more likely to come from New York.