People don’t buy records any more, so I suppose we’ll soon bid adieu to the metaphor of the broken phonographic record. I probably sound like my rhetorical needle is stuck in a flawed groove. But I remain steadfast in suggesting that most of the energy price gains this winter are attributable to money flow into all commodities in general, and into oil very specifically. Current crude oil prices have everything to do with money flow and crowd behavior, and little to do with the actual flow of oil from producing nations to consuming countries.
That said, OPEC will meet tomorrow and they will convene against the backdrop of a basket price of about $97.75 bbl for all of their crude blends. This price, if sustained, threatens to make basket cases of the rest of us. U.S. crude action yesterday saw the April month hit an all time high of $103.95 bbl yesterday morning, and that record is hardly secure.
A bit later in this post, I’ll examine the speculative dynamic of the futures market at this moment in time. But first, let’s take a look at today’s numbers.
The March 4, 2008 Numbers
The nationwide gasoline price is $3.168 gal this morning. It accelerated rapidly in the second half of February but has moved mostly sideways in the first few days of March. Retail gasoline prices may indeed be tepid for the first part of March, but the seasonal template should provide lift of 35-60cts gal from say March 15 through May 15.
U.S. drivers are today paying about $1.2-billion each day for their gasoline, compared to $937-million. I would compare these numbers to 2002 or 2003 per diem costs, but that might inspire SUV drivers and Cab company execs to weep openly.
Lost in our American obsession with gasoline are the brutal new records that have been established in recent days for diesel, heating oil, and jet fuel. These three products aren’t just up in North America - - every continent now finds wholesale prices for these products that exceed previous record levels by 20-40cts gal.
Within the next day, we may even see a U.S. state with an average price for diesel that will surpass $4.00 gal. Hawaii is within a fraction of a penny of that mark and no end to the price acceleration is in sight. Note to Hawaiian regulators: I am prepared to analyze this particular escalation with on-the-the-spot observation and due diligence upon request, and would recommend that particular focus be placed on Maui.
The nationwide average price for diesel today is $3.681 gal, which is 99.9cts gal above the average price recorded one year ago. Forgive me if I round that up to one dollar. Those 18 wheelers you see on the highway typically operate with a couple of 150 gallon tanks, so it costs about $1104 to fill up a semi that has been running on empty. If C.W. McCall wanted to put together a convoy, he might have to procure a second mortgage.
The prices that commercial airlines now face are also at all time highs. Within the major refining centers, jet fuel costs nearly $3.00 gal. Into-the-wing prices are considerably higher, depending on where those wings are loading fuel.
Special Note: Oil Price Information Service covers all of these prices at the wholesale level (over 30,000 daily numbers) and at the retail level (100,000-400,000 prices, depending on if you count all grades of gasoline and diesel separately). Tomorrow, we will be issuing what should be a very timely report called the OPIS Transportation Fuel Index (TFI) that measures wholesale and retail fuel inflation. This will be available at www.opisnet.com/tfi.asp This report will provide discovery on wholesale and retail fuel inflation (and eventually, deflation, one would think) many weeks ahead of government data.
Back To The Issue Of Money Flow
I may soon have to retire one of my favorite metaphors. When crude soared above $90 bbl, I suggested that the fever pitch of the price escalation was similar to the human body temperature. Crude could flirt with the century mark, much the way a fever spikes, but eventually the patient gets healthy and the body temperature should moderate. This metaphor may be tossed out the window shortly, perhaps because of the cold blooded nature of the traders whose playpen is the futures market.
It’s not just crude, heating oil, or gasoline futures that represent the hottest asset class since mutual funds took off 30 years ago. Corn prices have surpassed $5.50 per bushel and Gold may soon hit $1,000 per ounce (good news for Mr. T). Many commodities are at their highest levels since record-keeping on these markets began.
There is one government report that monitors the speculative action across all commodities. It may be flawed (some of the folks listed in a column meant to reflect “the trade” may actually be quite speculative in nature) but it provides a glimpse of the “like thinking” that the banks, hedge funds, speculative money pools, etc. employ in the current oil market.
I’ll cut to the chase in this latest government report (published weekly by the Commodities Futures Trading Commission or CFTC).
When one focuses merely on the speculators - - what the CFTC refers to as non-commercial entities - - one finds that there is about $24-billion more money bet on higher crude oil, gasoline, and heating oil prices than is wagered on a lower price outcome.
I believe that this is a record amount of money skewed to the long side of the market. It’s big money, but will it turn out to be smart money?
Let me also give you a quick sense of scale. The typical large speculator that has bet on higher crude prices holds a position of 3,000 futures contracts, or a nice tidy clean number of 3-million bbl worth of WTI or more than $300-million worth of crude! There are 99 such companies that make up this group. In the casino business, they would be known as whales.
Postscript: I’ll be visiting Jupiter later this week - - Jupiter, Florida that is. The New Jersey town I live in is next to Neptune, and I’m hoping to rent a Saturn for transportation. This is all being done in the context of the plaintive hope that the planets can be aligned and all of this fuel price escalation nonsense might run an early course. Contrary to what some of my co-workers might say, I am not simply fleeing the nonsense of chaotic oil markets. That action is reserved for a later trip.