No, your eyes are not deceiving you. Whether you drive in the city, the suburbs, or the countryside, you may notice this week that retail gasoline pump prices are falling. They will retreat considerably more between now and the NFL championship games on Sunday. But like my beloved Giants, I would urge you to enjoy the run while it lasts. The pleasant times could persist for weeks, but I fear it will end badly.
In the case of the Giants, it could end badly this Sunday or when the Superbowl is played on February 3 (I’ll be traveling to Iowa, and it will take approximately eight hours to get there, which means I’ll miss about 30% of the pregame show). In the case of gasoline prices, the winds will change in February or March.
Retail unleaded regular averaged $3.06 gal today (see www.fuelgaugereport.com for details). That is approximately 83cts gal above the price on this day in 2007. The retail decline last year persisted until we bottomed out at $2.143 gal on January 29. Street prices then began a long climb to $3.21 gal by Memorial Day weekend, in effect gaining 50.5% from the Winter nadir.
We’re on a path that should put the great majority of U.S. states under $3.00 gal within the next week. Do not be surprised if you even see some $2.75 gal or lower prices. Those will almost certainly turn up in the Rust Belt states along the Great Lakes where Winter weather can do substantial damage to demand. But even the U.S. West Coast residents are likely to see sub-$3.00 gal gasoline if they are inclined to shop around.
The sagging prices are due to the wholesale trend which continues to deliver lower costs at every petroleum terminal across the country. And don’t be misled by the occasional macro-demand report that suggests motorists are driving more than ever - - they are not, and future reports from MasterCard and the Department of Energy will soon confirm this sluggish behavior, I predict.
Wall Street still believes that crude oil is on a medium and long term up ramp. But the bull run has been interrupted by the talk of recession. Consider that an advanced search on Google late this afternoon yielded 50,277 news stories that reference the word “recession.” For comparison’s sake, only 19,607 stories referenced Britney Spears. Now, that is what one would call the business buzz!
Assuming that crude oil doesn’t rally on Boston Whaler action in the Straits of Hormuz or some more labor action in war-torn Nigeria over the next ten days, how low might one expect fuel prices to go?
One rule of thumb I use depends on a calculus that takes the local wholesale price, adds 45cts gal in average state, federal and parochial taxes, and then adds the paltry sum of 15cts gal for retail profit (your average Joe or Jane always assumes that retailers make 50cts gal or more, but Joe & Jane are always wrong). The shortcut version is you can add 60cts gal to wholesale and get an idea where retail might be headed, if prices remained frozen in time.
Wholesale or spot prices today were about $2.28 gal in New York; $2.23 gal at the Texas Gulf Cost; $2.10 gal in Chicago; and $2.12-$2.15 gal at West Coast ports like Los Angeles, San Francisco, or Seattle. In most cases, these are the lowest wholesale prices we have seen since November.
You can do the math. Places like southern Illinois, Indiana, and Ohio could see retail prices of $2.70 gal or so if we maintain this present course. California will see “off-brand” locations under $3.00 gal by Sunday. Perhaps we’ll see some political candidates take credit for the price drops when the Super Tuesday primaries are conducted next month. Then, they’ll get into their limos and SUV’s for the next stump speech.
But despite the ongoing drumbeat of recession, don’t get used to the numbers. I’m not an economist (although I occasionally play one on TV) but as far as fuel prices go, I’m pretty confident. We’ll be back on the up ramp later this quarter, thanks to the typical manifestation of petronoia.
Odds & Ends . . .
Publicly traded refiners have been hammered on Wall Street so far this year, with several marquee companies losing billions of dollars in market cap values. I don’t believe the refinery renaissance is over. Like some of the television dramas and comedies, it (the renaissance) is on hiatus. I suspect that when May sweeps are in progress, we’ll see U.S. refiners doing very well.
Publicly traded retail companies are finally seeing a Big Inning. The public, and even many of those in financial markets, incorrectly assume that firms with a large presence in retail gasoline make much of the money in rising markets. The reverse is true and they still have the bases loaded in this first inning of 2008.
Those reports of ethanol’s death were premature at best, and nonsense at worst. I do not invest in petroleum or ethanol companies, so I don’t have a vested interest. But if one looks at the numbers, one can see that wholesale ethanol prices have advanced by 50-70cts gal since November 1. Wholesale gasoline prices over the same period have dropped by anywhere from a few pennies to as much as 15cts gal.
E10 - - the gasoline blend that is comprised of 90% gasoline blendstock and 10% pure ethanol - - is getting rolled out in many more U.S. cities. Snowbirds heading to Florida who favor ethanol in their gasoline can now find the grade in virtually all states east of the Mississippi. It will be the default grade or the most common blend by Cinco de Mayo. (Yes, this last reference is a somewhat veiled attempt to get that TV spot on Telemundo that I’ve been clamoring for).