Crude oil prices hit $108 bbl this afternoon, before backing off and settling at $107.90 bbl for West Texas Intermediate crude (WTI) for April delivery on the NYMEX.  Approximately 300-million barrels exchanged hands for this April benchmark contract. Perspective break - - The U.S. produces about 200,000 bbl of WTI each day, so the market actually traded as much sweet WTI crude as the country will produce in the next four years.  Or, if you prefer, April futures’ volume surpassed the volume of all crude that the U.S. is likely to import for the next 30 days. If we add the action in other delivery months, you get much higher multiples.

    I provide this as background, so that readers can understand that the oil futures market really is like the Thunderdome that served as the venue for much of the action in the third installment of the Mad Max movie series. There is “controlled chaos” beneath the surface and an arena where “two men enter, and one man leaves” (intonated memorably by Tina Turner in a memorable role as Aunty Entity).

   I’ll have more comments on the chaos of the oil futures arena in a moment. But first, I’d like to put this 2008 rally in perspective, and make still more comments on the supposed “inevitability” of $4.00 gal gasoline this Spring.  I’m sticking with a $3.50 gal as a minimum target, but I now believe we could see prices getting slightly above the $3.75 gal that I previously thought might serve as the top of the targeted range.

   The nationwide average price for gasoline surpassed $3.22 gal today, and as I write this, it is within 0.5cts gal of the record $3.227 gal price recorded last Memorial Day. We will break that record tomorrow or Wednesday, without question.

   This entire Winter rally has been driven by crude. On February 7, the value of the near term WTI crude oil futures contract was $87 bbl. The average pump price was $2.97 gal.

    In 32 days, crude oil has spiked by $21 barrel or if you make the conversion (there are 42 gallons in every barrel) a nice tidy 50cts gal. Retail prices have moved up by 25cts gal (or, just $10.50 bbl) in the same period.  There is still much catching up to do on the street - - if pump prices simply match crude’s performance, we are looking at another 25cts gal of upside).

The Case Against $4.00 Gal Gasoline

   Refiners are no longer making oodles of money on gasoline. Wholesale gasoline prices range from $109 bbl in New York to $112 bbl in Chicago, representing very modest margins (or gasoline ‘crack’ spreads) of just a few dollars per barrel. California is a modest exception --  - wholesale gasoline there commands $119 bbl, which is not a renaissance level, but is still reasonable when viewed against recent history.

  The big money is the province of crude oil producers, and of course, those who bet right (so far) on the boom in prices across most commodities. Gasoline retailers are barely making ends meet in all of the continental states (I am unaware of the specific dynamics of Hawaiian gasoline, but await that invitation to give a visual inspection).

    Last year, we saw refinery margins for gasoline swell to $35-$40 bbl during the Spring. If the same expansion were to impact motor fuel this year, and crude were to remain at say $108 bbl, we would see wholesale prices of $3.40-$3.52 gal, and that would point to retail prices of $4.00-$4.12 gal (through recent history, street prices have run around 60cts gal above wholesale, and that reflects about 45cts gal in tax, and about 15cts gal in mark-up).

    I don’t think we’ll get there.  A $4.00 gal nationwide average for gasoline is a bit like hitting .400 in the major leagues (last accomplished by the Splendid Splinter, Ted Williams). It’s possible, but not probable.

   In baseball, it is more difficult to achieve or maintain a .400 batting average these days thanks to the behavior of pitchers who would just as soon walk or pitch around any one  close to this watershed number. Similarly, an advance to $4.00 gal for gasoline prices is hamstrung by the behavior of the driving population.  Demand begins to ease once U.S. prices eclipse $3.25 gal, and I would suggest that demand would dip much more appreciably when prices move above $3.50 gal. Only a few percentage points determine whether U.S. gasoline supplies can be described as short, or long.  Large portions of the population cut back on their motor fuel usage when street prices advance, and they’re not motivated by the metrics of personal disposable income - - rightly or wrongly, the teeming masses can be motivated by outrage or spite. (Never underestimate the power of the latter).

   I still expect that street prices for gasoline will peak somewhere north of $3.50 gal, and somewhere south of $4.00 gal in April and May. And I wouldn’t be surprised to see lower prices for crude when that occurs.

“The Crowd Always Chooses Barabbas”

   I wish I could take credit for the subheading above, since it so succinctly summarizes the diminished intelligence or “group-think” that comes when human beings act collectively in great numbers. But the quote belongs to French philosopher Jean Cocteau.

    In my opinion, crude oil prices have become decoupled from any reality except the reality of money flow. The volumes for oil futures, options, and derivatives continue to swell and the participation in these markets is coming to a theater near you. We’ve had an ETF - - exchange traded fund - - for WTI crude futures since Spring 2006, and we now have an ETF for gasoline futures as well. A speculator, or if you prefer - - investor - - can spend as little as $50 - - and take a ride on the oil or gasoline train.

   Notwithstanding the tremendous respect I have for Goldman Sachs, and the strong track record the Wall Street investment house has demonstrated in oil over the last two years,

 I believe crude oil prices are severely overcooked.

  Put it this way: crude oil is morbidly obese. High street prices for gasoline and diesel (a half dozen states now have average prices above $4.00 gal) represent the flabby man-breasts of the market. There is no Richard Simmons, or Jenny Craig, or personal trainer likely to surface among our political leaders. Discipline is apparently not an option.

   The calories fueling the patient’s feeding frenzy come primarily from the money managers who believe that investing in oil represents safety, or a flight-to-quality, or the next big thing in investing. .