A little less than one week ago, I projected that we would probably see nationwide gasoline prices average $3.00 gal or less for about 60 days. We haven’t exactly blitzed beneath this hot button number - - the last seven days have seen average U.S. prices of $2.98 gal to just a fraction under $3.00 gal. We may indeed see a tick or two above $3.00 gal, but the big moves are weeks or months away.
Oil markets started this week on a tepid note, as they are prone to do during the “silly season” that prevails from mid-December to the first full week after New Years day revelry. Wholesale prices drifted down and I suspect that we’ll see the nationwide regular unleaded average stay just below $3.00 gal into 2008. Likewise, there is no major energy weather that stands to prompt huge changes in heating oil or diesel prices. Average diesel pump prices have backed off to $3.414 gal after reaching an all time record of $3.496 gallon on November 29. We didn’t get to $3.50 gal but came close.
Today was the first day that the government data issued by the Energy Information Administration (EIA) noted a visit below $3.00 gal. Again, the OPIS database put together for AAA has a larger sampling (about 100,000 unique fueling sites), is updated in real time, and is not paid for by taxpayers. We have sported an average below $3.00 gal since December 11 and the price was $2.996 gal today, or almost precisely 70cts gal above the number one year ago. Bookmark www.fuelgaugereport.com and you can see an updated price each day.
Some Chilling Forecasts . . . .
The last paragraph may evoke thoughts that I have a beef with EIA, and I do not. They do great work in that department and some of the experts on staff are among the few temperate and measured voices in the energy sea of hyperbole.
And that’s what frightens me these days. The folks at EIA don’t have a dog in this fight, or a horse in the race, or a vested or emotional interest in any particular outcome in fuel prices. But last week, these normally very conservative analysis group came out with a very chilling forecast.
In case you missed it, EIA projected record pump prices of higher than $3.40 gal in Spring 2008, thanks to wholesale prices that will fall between $2.80-$3.05 gal. Forecasting long term price trends hasn’t been an exact science this decade, but the sobering thought is that most EIA projections (like the predictions of yours’ truly) have generally understated the updrafts. One criticism I have is that EIA doesn’t talk about financial money flow (investment or speculation) in its report. Let me give you an updated SAT analogy for context: Financial investment & speculation are to oil prices as steroids and human growth hormone are to baseball statistics.
A second entity that can accurately claim a very strong predictive record since 2006 is investment house Goldman Sachs. Research analysts for the financial conglomerate have more gravitas than your standard vanilla grade investment commentary, since Goldman accurately first foretold the crude oil visit to $100 bbl territory. Goldman Sachs projects much higher numbers than even the surprisingly bullish EIA scenario. In a report entitled “Bull in a bear’s disguise,” the company raised its year-end expectation for WTI crude (the futures’ benchmark grade) to $105 bbl, up from a previously robust $94 bbl. Goldman also forecasts a climb within the next three months to nearly $2.80 gal for the gasoline blendstock futures market.
The bank didn’t detail projections for individual wholesale markets, but a futures’ market surge to $2.80 gal would probably portend wholesale spot market quotes of $2.75 gal to $3.20 gal, with the highest prices reserved for the West Coast. Goldman Sachs isn’t just bullish about crude oil and gasoline - - it also projects a $5.30 bushel price for corn by the end of 2008, and posits sharply higher numbers for natural gas. Those familiar with ethanol production metrics say that these components could push the “break even” cost for ethanol to $2.25 gal or so. More about ethanol in a moment.
Neither the EIA nor the Goldman Sachs forecast predicts a significant U.S. economic slowdown and that may be the key flaw. Indeed, if wholesale fuel prices rally some 30-50cts gal above current levels, the cash flow woes for distributors and retailers could lead to a systemic breakdown in normal petroleum distribution. When you see an oil transport truck pass you on the highway, just recognize that it is carrying some $25,000-$30,000 worth of fuel. When the Spice Girls were on their first go-round, the cost was perhaps $10,000.
I’ll deliver my own fearless but uninsured forecast next week. Like EIA, I have no vested interest, and unlike Goldman Sachs, I am not particularly well-heeled. Hint: never underestimate the market’s capacity for brief extremes.
The Wall Street Journal Ethanol Rally
An old saw among oil traders holds that when the mass media starts talking about high prices, the rally is over. The Today Show, for example, had Matt Lauer spend a week talking about the impact of $100 bbl oil, but we didn’t get there in November when they ran the series. (Note: I haven’t been on the Monday-Friday version of the show in some time, but I don’t believe it is because Matt has follicular envy).
Perhaps the old saw is accurate for low price mass media coverage as well. On November 28, the Wall Street Journal ran a story that convinced a lot of entrepreneurs and grain investors that ethanol was not Secretariat, but Mr. Ed in disguise.
Since that story ran, ethanol prices have moved higher by about 20-25cts gal in most of the major U.S. spot markets, even though gasoline has moved lower or labored mostly sideways. Ethanol blends of gasoline (10% ethanol and 90% gasoline blendstock) are now showing up in places like Orlando and Miami, Florida; Reading and Harrisburg, Pennsylvania, and we’ll see these gasohol grades soon in the Carolinas and Georgia.
Warning to lobbyists and zealots: This is neither an endorsement nor a criticism of ethanol. It’s simply an acknowledgement that when wholesale prices for ethanol are lower than wholesale prices for gasoline, there will be greater use of the former at the expense of the latter. Wholesale ethanol prices spent much of November some 40-60cts gal under the price of gasoline blendstock (the gap is now about 15-30cts gal) and that is the simple economic motivation needed to include it in gasoline formulations.