U.S. gasoline prices surpassed $3.57 gal last evening, and they will almost certainly advance above $3.60 gal this weekend. All of the tea leaves pointed to this April surge. May is a much more difficult month to forecast, and it could see a turn. If so, some 90% of the professional traders will be proven wrong. More on that in a moment.
But first, the scorecard: Today’s retail unleaded average of $3.577 gal puts gasoline values exactly 70cts gal higher than what was witnessed on April 25, 2007. Based on recent government demand estimates, we’ll spend about $1.396-billion on motor fuel today, compared with $1.128-billion a year ago. The same day in 2002 produced an aggregate gasoline cost of $516-million.
So far in 2008, Americans have spent about $152-billion on gasoline. Through this day last year, we spent about $116-billion. This is Leap Year, but the addition of February 29 accounts for only $1.2-billion more of the 2008 tally.
The end of this week brings some troubling developments. A threatened strike in the U.K. has put a major North Sea pipeline’s output in jeopardy, and its shutdown could remove 700,000 barrels per day of sweet crude from the marketplace. Meanwhile, some Nigerian unrest has surfaced with yet another pipeline under attack by rebels.
Meanwhile, the ether world is rife with predictions of $150 bbl to $200 bbl crude, as well as $5-$7 gal gasoline. Those pronouncements, however flawed, get much more ink than temperate calls.
It’s enough to make even an even tempered analyst wonder whether there has been a “sea change” in oil markets. However, I’m still prone to believing that we are not on the threshold of a dreaded new era of manic oil prices, and that we are simply living up to fairly well-entrenched template. That template suggests that April price increases may give way to some late May decreases. Here’s why:
- There are generally two high tides each year for crude oil, and for gasoline. The most predictable high tide comes in April and early May; the less reliable second rise comes during hurricane season. Ebb tides can be pretty severe – crude oil might give up 15-20% of value in any given year, which these days would translate into a $17-$24 bbl downside move.
- Market tops are often signaled by rhetorical extremes. We are certainly seeing that now, with oil likely to be the lead story for each network newscast and many print publications. I’ve been asked to do more radio this week than Paul Harvey did in his prime, and if I answered every print inquiry, I’d be in more newspapers than the Sudoku. I paused before writing this paragraph to google-search the term “oil price” in the news filter, and found 104,000 entries. There were only 5347 results for Paris Hilton and much more tragically, just 17,712 hits for Darfur.
- The sentiment is almost entirely bullish. A survey group that measures the outlook among commodity professionals finds that more than 90% of those in that group describe themselves as “bullish”. When 90% of investors or speculators are bullish about any given asset, it’s generally a tip-off that all of the buyers have already staked their claim, and the market is ripe for a turn.
- High oil prices have consequences. Oil prices have advanced by $68 bbl since late January 2007. That translates into increases worldwide of at least $1.62 gal for everything from gasoline to asphalt. Demand destruction will occur at these levels, not just in the U.S. but in developing countries as well.
I could be wrong but I still believe that we are within 5% or so of the likely top for U.S. fuel prices in 2008. Crude oil would need to go to $130 bbl to $135 bbl in order to bring the dreaded $4.00 gal average into play.
But this could be the dreaded “Black Swan” event where history, observation, and empirical evidence all fail to give reasonable guidance for an unexpected development. The classic case: a turkey awakens on 1,000 mornings, gets fed, and has a comfortable living, but suddenly on the 1001st day is brought to the chopping block for a Thanksgiving meal.
I would hate to compare the maddening crowd of investors, speculators, et al to poultry. Lemmings . . . that’s more like it.