I’ve often compared the oil futures markets to a multi-trillion dollar game of Chutes & Ladders, the Milton Bradley board game where the luck of the dice would enable someone to climb past, or slip well beneath fellow competitors. (For my British readers, the game is known as Snakes & Ladders)
Today, Friday August 8, 2008, is a day that has put a major crude oil chute on the board. If WTI crude oil futures were to close at below say $116.50 bbl, it would signal to many of the chartists and statisticians who follow oil that prices could shoot (or chute) lower and flirt with the $100 bbl mark.
Of course, many of the same market chartists or “technicians” thought as recently as July that crude might climb some ladders and peak somewhere between $155 bbl and $200 bbl. Smart people were no doubt influenced by the trumpeted analysis of major investment banks who predicted that the last few months of 2008 would see crude oil prices of $175-$200 bbl thanks to the perception that world demand would exceed supply.
The game isn’t over, and the superspikists can find ready-made ladders should there be any disruption in the various unstable parts of the world that deliver western countries their oil.
I don’t agree with journalists or critics who say that the superspikists have “egg on their face.” The yolk will be on us if we continue to behave as though stable oil supply is a certainty and return to some of the excessive behaviors that brought this crisis about.
More Ranting, But First a Scorecard
The nationwide price for regular unleaded gasoline today is $3.836 gal. Based on recent demand, consumers are spending some $1.527-billion per day on motor fuel. We peaked just shy of $1.6-billion about three weeks ago.
We will go below the $1.5-billion mark next week. It will be the first time that we’ve slipped below that nice round number since June 3, representing a streak of about 75 days. But it’s hardly a cause for celebration, given the fact that we are still spending about three times as much on gasoline as we were six years ago.
.Since July 10, wholesale prices for gasoline are down by about 55cts gal on the East Coast; 40-45cts gal in the Midwest; and by 40cts gal on the West Coast. So, if prices were to remain about where they are on this Friday (about as likely a proposition as spontaneous behavior at this month’s political conventions) we still have another 10-20cts gal of “catch-up” price weakness at the pump.
By the way, there is much more relief for products like diesel, jet fuel, and heating oil. Wholesale prices for those products are down by 80-90cts gal in less than a month. Despite a national average diesel price of $4.59 gal today, you might see retail prices closer to $4.00 gal within the next few weeks.
Why Such Weakness Now?
The midsummer price weakness can be linked to soft U.S. and European demand, and it can be tied to temperate weather, relative calm in global production hot spots, and a smooth Spring and Summer for most refineries. But the major culprit for this downturn has been money, plain and simple.
Money chased money throughout the second quarter and continued to be the dominant fundamental for the first ten days of July. It cascaded in to the market on the premise that energy futures (and to some extent, all commodities) represented the hottest asset class for investment. However, the first week of August has provoked some scrutiny of the hasty exit of some of this fast money.
The buzz term on Wall Street this month is “commodities’ outflow.” Analysts who watched futures across a wide gamut of resources noted, with some alarm, that money was moving out of commodities at a pace not witnessed in all of 2008. Open interest numbers - - the measurement of positions held among both buyers and sellers - - dropped substantially in all of the public futures markets, whether one talked about oil, grain, or metals.
In short, the madding crowd has been trimmed in the last six weeks. Open interest numbers for crude oil and gold, for example, are down by more than 10% since early July. A drop of say, 100-thousand contracts in WTI, represents the exit of more than $12-billion worth of participation, and the sense is that the buyers have led the rush toward the exits.
The change in the crowd’s mood is also evident in various sentiment indices. A few months ago, it was not unusual if one asked ten traders of their outlook for crude to find eight or nine in ten with a bullish mien. There is still a bullish bias, but it is closer to a neutral reading of about 60%.