10/1 - - -Oil prices opened the tenth month pretty much like the N.Y. Mets ended the ninth month of the year - - they were sloppy and weak (confession: I am a Yankee fan). And there is some suggestion that the record highs are now part of the fossil record, as opposed to one of the Fall premiers on the movie or TV schedule.
October is a month that presents a very strong tradition of oil price downswings, but I wouldn’t be surprised to see the September 20, 2007 all time high record price of $83.90 bbl fall between now and say mid-month. Instinct tells me that we are peaking, but there’s a difference between peaking and past peak, and one can only recognize the peak in the rear view mirror (hence, the reference to the Tag Team 1993 hit song Whoomph, There It Is … that would probably make the Gershwin brothers rotate in their graves).
It would be more convincing if crude oil futures hit, or closed, at a number that invited apocalyptic press coverage. Spike tops generally reflect even more froth and foam than we saw on September 20, or during last Friday when some additional time was spent with prices above $83 bbl for WTI crude oil futures.
There is one huge indicator that a peak is nearby, and that can be gleaned by looking at trader sentiment. That sentiment for crude, as represented by the daily “Bullish Consensus” number compiled by Market Vane service (www.marketvane.net) was at 83% in the crude oil segment. That is an inordinately high number even when one recognizes that it’s the herd instinct, as opposed to sophisticated models, fundamentals, geopolitical concerns, and a weak Dollar that has driven prices to 2007 record levels. Anything north of 70% translates to buyer beware.
An Impromptu Scorecard . . .
We began October with nationwide retail gasoline prices at $2.79 gal, which is 43.7cts gal below the Memorial Day pump peak. It is also, however, about 47cts gal above the price we collectively paid on this day last year. Let me translate that into some numbers that the teeming masses can relate to.
Americans paid about $1.082-billion for today’s purchases of gasoline based on most recent demand estimates. That compares to $903.6-billion last year. Incidentally, there is evidence that demand is actually flat to 2006 or even slightly below 2006 numbers on this date.
A longer term perspective is more revealing, and please do not take these comments to be political (I swear off advocacy journalism and attest to be apolitical at all costs).
If one goes back to 2002, the average cost for motor fuel on October 1 was just $531-million (the retail price for unleaded regular was $1.42 gal). Okay, remember that number, and then recognize that most of the reasonable cost estimates for the Iraqi war are around $300-million per diem.
I am not tying the two costs together for any political agenda, but it intrigues me that we are paying about $851-million more each day (whether in brazen LED signs or buried in budget costs) than we incurred on this day five years ago. Yet, the Dow Jones closed at a record high of 14,087.55 today and the NASDAQ Composite and S&P 500 both closed at their highest levels since February 2001. If you can find some economists who predicted these multiple outcomes, I suggest you have them manage your money in perpetuity.
Looking Back at the Third Quarter . . .
I hate to beat the baseball metaphor to death, but the quarter ended very badly- -like the Mets and the Brewers-- for at least one segment. If you buy gasoline from refiners and sell it at the pump, the 3rd quarter ended with average gross margins of about 10cts gal for C-store marketers. The average retail pump price in the quarter was $2.847 gal and the average margin through the entire period was just over 15cts gal. That’s better than the second quarter average of 13.6cts gal but well below the magical third quarter in 2006 when retailers made what was for them, a hefty 19.6cts gal margin. (The public believes that retailers make 30-50cts gal on gasoline sales and I’ve given up trying to convince them otherwise. Choose to believe what you wish, if that is your mien.)
If a company produced crude from July through September, it had a championship season in the quarter as average prices for sweet crude came in at $75.15 bbl (compared to $70.54 bbl in Q3 2006) and with $65.02 bbl in the second quarter of this year.
If you refined sweet crude, you made a lot of money by making diesel, or heating oil, or kerosene. Gross margins for diesel manufactured by refiners ranged from $16.28 bbl at the Gulf Coast to $22.50 bbl in the Midwest. Gross margins for gasoline ranged from a low of $11.54 bbl at the Gulf Coast in the quarter to a high of nearly $21 bbl in the Midwest. These are still refinery renaissance levels, but the canvas for the paintings has been altered.
On this opening day of October, a Gulf Coast refiner can expect to get only about $3.25 bbl in gross margin for gasoline - - down from $30-$40 bbl levels in the Spring. But the bright side is that those refiners can still get about $15.50 bbl in gross margin for diesel.
Which brings up today’s dispelled myth: In the next six weeks or so, you will hear many self-proclaimed experts (usually advocates of trading strategies) who suggest that we have started the Autumn refinery “turnaround” season.
This is true. The two times of year that see the most refinery maintenance are February/March and October/November. They represent “shoulder” months which don’t see peak gasoline demand, nor peak heating oil usage, so it makes sense to schedule work within these intervals.
But what’s not true, and what gets reiterated year after year is the mythical notion of refineries altering their equipment (turning it around) so that they can significantly maximize production of heating oil and minimize production of gasoline.
If only refineries were as simple of structures as ceiling fans, then this would be true. But the reality is that refiners can only tweak their production numbers by only a few percentage points --- they cannot go from making 60% gasoline to making 60% diesel and heating oil at the flip of a switch.
But that is not what you will be hearing in the sound bites and comments from cheerleaders in October and November. You heard it here, where there are no vested interests attached.