No, the title above is not in reference to the celebrated book by oil analyst Matt
Simmons (Trash talking footnote: Mr. Simmons is a highly regarded energy pundit, but I have better hair).
The title instead applies to some shoot-from-the-hip statements that I’ll deliver in a moment from the squalid premises of the Ritz Carlton Lake Las Vegas, where OPIS just concluded its 9th Annual Supply Summit. (Just kidding, Ritz lawyers) Twilight here in the mountains of Henderson, Nevada comes with vibrant colors and invites almost mystical reflection. I’ve spent the last two days listening to some of the best minds in the oil business. They collectively painted a portrait of a very uncertain and incredibly volatile landscape for crude, gasoline, diesel fuel, as well as ethanol and biodiesel. Bear with me for a few paragraphs, and I’ll comment on some of the broad strokes that I believe will color the next few months.
First let me share some numbers as well as an apology. I have not posted comments in this space in some time, as many of my recent days were spent in preparation of this summit. It is a meeting that my peers say provides the best content and diversity of opinion on oil supply. More importantly, there are always at least eight or nine lucid observations that I can borrow, steal, or convert into substantial content for my own presentations.
In each of the eight previous October dates when this meeting has been held, the market backdrop has been relatively quiet. This year’s meeting took place against nothing short of a crude oil price spike. Tomorrow could indeed be a day that haunts bulls and bears in the energy markets for months to come, but more on this later. In the meantime, if you are wondering; Yes, I sometimes feel as though I have taken stupid pills in terms of providing some measured and temperate guidance on what looms ahead for fuel prices.
Today’s numbers:
October 30, 2007 finds retail gasoline selling for $2.875 gal nationally, a number modest compared to the $3.25 gal or so witnessed five months ago, but still a hefty 66.3cts gal above where prices were when kids trick-or-treated a year ago. That translates into about $250-million more for Mischief Night fill-ups this year.
The average price for diesel is now at $3.21 gal, less than a nickel above the very brief but spectacular all time high reached in the wake of Hurricane Rita in October 2005. The record could easily fall in the next few days and many parts of the country find diesel fetching its highest price ever. When a trucker passes you on the highway, think about that eighteen wheeler paying nearly $100 more for say 150 gal of diesel fuel today versus the same quantity purchase a year ago.
Heating oil values are already at their highest numbers on record. If current wholesale prices were to remain stable in the next four months (a prospect as likely as a presidential candidate asking for energy sacrifice among voters), many homeowners in the northeast could expect a total heating season bill of well over $3,000.
A Very Spooky Halloween
There is no question, regardless of what one hears from those pumping and cheerleading the prospects of $100-$125 bbl crude, that the driving forces behind this crude oil move lie within the financial money managers. Many of us may have misread the staying power for crude oil in Autumn 2007, but we’ve now reached the point where a move to what some of the bulls regarded as a reasonable price - - about $70 bbl - - requires a drop of $20 bbl.
West Texas Intermediate crude today settled at $90.38 bbl. It traded for as little as $89.53 bbl and for as much as $93.68 bbl. A $4.00 bbl plus swing in crude oil prices rewards those who believe that love volatility, but it is extreme even by the wild contemporary standards of most commodities.
Halloween 2007 brings a confluence of events and questions that I can’t answer. Will the Fed cut rates and will that action push more money into a market that is as liquid as the Pacific Ocean? Will a rate cut push the U.S. Dollar toward new lows, and enable foreign buyers to buy more oil by converting their own stronger currencies into greenbacks? Has the probability of a Fed rate cut and its impact on the market already been discounted by the financial markets? And where will U.S. Department of Energy figures, due to be released midmorning tomorrow, show U.S. demand. A report with less gravitas in the trade issued this afternoon by MasterCard suggested that gasoline demand was down last week by 2%.
I suspect there will be resolution to these questions by the time I get off the plane late tomorrow afternoon in Newark (based on on-time arrival records, that could push me into November time zones for much of the globe).
If a weaker Dollar, and more money flowing into commodities is not already discounted by the markets, then $100 bbl crude is absolutely a possibility. And that puts $3.00 gal gasoline as a reasonable number for nationwide retail numbers in November. My gut tells me this won’t happen, but my gut also suggested that the Redskins +17 points represented a “lock” in the Nevada Sports Book last Sunday.
In some future posts, I’ll share some extensive thoughts on some of the wisdom dispensed at our just concluded meeting. But here are some quick teasers.
- Refiners aren’t thrilled about high crude prices, and they see no evidence of real tightness in procuring crude. Think of a refiner’s gasoline margin as a dog leash, and think Rottweiler. It’s a short leash in November, December, and January, with prices only a few dollars per barrel above crude. But the leash will be long in March, April, and May. Think of an untrained Jack Russell Terrier, or think of one of those unruly dogs that Zsa Zsa used to bring on The Tonight Show.
- We have to redefine the notion of excessive sentiment. I’ve mentioned the publisher of the Bullish Consensus – Market Vane - - in this space before. The publishing house asks investment analysts each day whether they have a bullish or bearish outlook for their clients (there’s no neutrality). Generally, anything above 70% is viewed as excessive. Recently, oil and several other commodities have seen bullish sentiment exceed 90%. If this data were presented in one of those Magic Eye paintings (where one concentrates on 3-D optics and relaxes the eyes to see a hidden image),you might expect to see the letters S-U-C-K-E-R show up in the background. But perhaps that has changed. Meanwhile, the bullish sentiment for the U.S. Dollar is in the teens.
- With yesterday’s high of $93.80 bbl for crude, we have seen a difference of $43.90 bbl between the 2007 low price for crude and the high so far. I began my career in the oil business in 1975 and not until August 2, 2004 did I see the first trade for crude oil at above $43.90 bbl.
- The year 2007 probably saw more talk about planned and unplanned refinery maintenance than any previous year. Experts in that arena do not attribute the 2007 troubles to a rotten infrastructure, but neither do they attribute it to a cluster of bad luck. The message is that 2008 refinery downtime will be extensive, and fuel many Spring headlines, just as it has since refining was put under the microscope of financial reporting. This could mean that even if sanity returns to crude pricing, we will see gasoline at least briefly come untethered from crude next Spring. That points to prices in excess of last year’s record $3.25 gal average when the boys of summer are back at spring training.
- Ethanol will make massive inroads into U.S. gasoline formulations, but at a pace hindered by transportation logistics and storage needs. It will temper the 2008 gasoline rally, but my sense is that it will make that impact after the maddening crowd has spawned a spectacular 2008 Spring rally.
- If one looks at the principal candidates in the presidential race with the names blanked out, there is little difference among the energy policies of same. Surprisingly, one can dig deep without finding any suggestion that perhaps the American public needs to chip in with some sacrifice.
- The volume of oil traded in the paper markets (futures, options, swaps, and other derivatives) has exploded globally and will continue to explode in 2008. Just within the futures’ segment (the commodity trading most people are familiar with), we are seeing three or four billion barrels worth of participation. World demand for crude oil, as a reference point, is perhaps 86-million bbl per day.
- The craftsmen who work on refineries, and perform the maintenance that is crucial to the day-to-day movement in prices, represent what is described as “an aging workforce.” I have three major observations on this point. (1) One can speculate on all sorts of complicated reasons for why refinery downtime is such a problem each Spring, but it comes down to a not-enough-qualified-people issue. (2) There is incredible irony in the notion that a shortage of welders making $27/hour can have a dramatic impact on the personal fortunes of hedge fund managers and directional traders who make $27 per nanosecond in some weeks. (3) I am 53 and resent getting tossed into that aging workforce bracket. If I were employed at 60 Minutes, I’d be the young buck.