Yet another record high was established today for retail gasoline prices, but some cracks in the armor of great energy bull market were uncovered this week. But more importantly, the free world is beginning a worthy polemic. Thought leaders (I just love that buzzword!), may soon examine whether commodities in general, and life blood materials such as crude oil and grain in particular, should be steered by the powerful twin engines of investment and speculation.

   I’ll weigh in with my thoughts on that matter via a short Q&A I’ve put together before I flee the oil world for a week of saltwater fishing, golf, and family. I had hoped to put off vacation until I could safely say we are past peak for prices. We may be at that point, but despite the tendency for June to bring a swoon to gasoline prices, I am very insecure. So with that caveat, here are today’s numbers:

    Regular gasoline averaged $3.962 gal nationally, a new record, albeit by a fraction that calculates to an average American cost of some $1.56-billion per diem. The country’s diesel average hit $4.792 gal, also a new record, but today or tomorrow’s number may represent the apex until late Summer.

    Most people don’t pay that much attention to diesel fuel, or jet fuel, or heating oil. I’ve stated before that the entire oil market is morbidly obese, and I’ll stretch that metaphor to emphasize those products’ importance to the economy. Gasoline may represent the flabby man breasts of this obese oil glut, but diesel and jet fuel are the internal organs. The damage that has been done to the commercial economy may not be irreparable, but it is much more substantial than government CPI and PPI data would have one believe.

   But back to the flabby man breasts. Today’s gasoline cost of $1.56-billion compares to $1.275-billion on this day last year and to $530.4-million in daily costs back in 2003 and $516.1-million on May 30, 2002.  Flabby man boobs, indeed.

    I gave a presentation last week to the Society of Independent Gasoline Marketers of America (www.sigma.org).  I used a different more tasteful metaphor to describe the 2008 oil market, and I borrowed a key word from my Jewish friends.  Think of the physics of water. Thanks to an explosion of trading, we’ve moved from opaque solid to a liquid market, but didn’t stop there. We are now seeing volumes that are many fold what is traded in the physical world, and the clarity that liquidity brings has been replaced by vapors. This represents life inside the Energy schvitz.

Of Hurricanes, Hyperbole, and Hysteria

    This weekend also marks the beginning of the 2008 Hurricane season and the winds of hyperbole are already past gale force. I’ll try to answer questions on this subject within the self-interview I’ve posted below.

1. Are we on the verge of $150 bbl crude and $4.50 gal gasoline?  Well, we have to get past $4.00 gal first and that number is not as certain as many might make it appear to be. Wholesale prices east of the Rockies are around $3.25-$3.30 gal. Retail numbers are usually about 60cts gal above wholesale, so today’s numbers translate into $3.85-$3.90 gal in many states. Western states like California find wholesale gas at $3.70 gal, so the $4.00 gal number has already been breached on the Pacific Coast. And by the way, June is typically a swoon month for gasoline, particularly in this decade. In nearly all years, the high tide for gasoline and crude occurs in April/May and again in an August-October timing window. So, we very well may see some relief and then make another assault on the summit toward Summer’s end.
2. Who’s doing well? Oil producers are doing splendidly as crude at $125-$135 bbl reflects a multiple of cost-of-production that is off the charts. Refiners had a truly awful first third of the year, but they are doing better now. Most recent numbers show refineries getting margins of about $10 bbl or more east of the Rockies and above $25 bbl on the West Coast.  Distributors and retailers have been miserable for all of 2008, much like the N.Y. Knicks. Yesterday saw the bankruptcy filing of a 280 site c-store chain in the Middle Atlantic and more bankruptcies may follow if price relief doesn’t occur soon.
3. What about those hurricanes? Do hurricanes put all kinds of numbers in play? Yes, but with an explanation.  Most hurricanes do more damage to U.S. demand than they do to U.S. supply. Katrina and Rita are notable exceptions. Once U.S. weather forecasters put those spaghetti strand models on TV, with some of the strands targeting Houston, or Corpus Christi, or New Orleans, there are few folks willing to sell into oil markets.  But if you listen to traders, or to media outlets hyping the greatest hurricane season ever, you would believe that a single fettucini strand will bring a Category 5 hurricane from the tropics across the offshore oil fields, over the key refining centers of Pt. Arthur and Houston, and then up the Mississippi to Chicago. Hurricanes don’t usually hit refinery row which extends from Corpus Christi west to Pascagoula, Mississippi.
4. There was all sorts of talk about speculation in the oil markets this week. What’s up with that?  I’ve droned on about this before. We need to resurrect Noah Webster to explain the semantic differences between speculation and investment. The biggest fundamental in the oil markets these days is money, and some of it is highly speculative and some of it is patient, and sleepy, or passive. Money has poured into oil futures in the last year from cowboy entities like hedge funds, but also from sleepy investment vehicles like index funds. Oil, and more broadly, any commodities that believe Chinese and Indian demand will tap natural and renewable resources, represents one of the hottest asset classes for investment these days.
5. Who do you blame?   I blame Mr. Rogers, but I’m speaking of Jim Rogers, and not the late Fred Rogers.  Jim Rogers is appropriately called an “investment guru” because of the success he had in managing the Quantum Fund with George Soros. Mr. Jim Rogers has been the loudest voice proclaiming this to be the golden age of commodity investment.

But one might ask a follow-up question: at what cost?  If investors and speculators continue to bid oil, and corn, and wheat prices higher and higher, what will the hundreds of millions of people at the bottom of the food or fuel chains be able to afford?

To borrow another Jewish word, I dearly hope the answer is not bubkes.