We all love to criticize commodities’ markets but at least the participants never follow the unofficial U.S. Army credo of “hurry up and wait”. One can identify a 30-40 day pricing trend in the oil markets, sit back, and watch as the futures’ exchanges deliver 10% moves in the space of 48-72 hours.
That’s what happened this week. Last Friday, crude oil hit an intraday low of $111.34 bbl (about $36 bbl below the early July peak) and by Thursday midday we saw that same barrel of crude fetch more than $122 bbl. If this were the Dow Jones Industrial Average, it would be the equivalent of an 1100 point swing.
If you peruse the news headlines today, you might conclude that the rally of more than $10 bbl was due to new Cold War tensions between the U.S. and Russia.
Is that true you ask? As a person of entirely Slavic descent, I can look into Vladimir Putin’s eyes and answer this with a clean slice of Russian dialect.
Nyet! Nyet! A thousand times, Nyet!
Behind The Bounce
Russia, like Nigeria and Venezuela, has often been a scapegoat for price advances through the years and there are plenty of Russian oligarchs and billionaires who can now ingest beluga caviar much like our rural Americans can scoff down biscuits and gravy.
But this week’s price rise was spread across many commodities. Corn has advanced some 25% from its July bottom and Gold and Silver traders have bounced as well. Russia produces all of those commodities but it would be quite a coincidence if they all rose because of fears about a 21st century Cold War.
The truth is that the oil futures’ market is huge and vast and complicated with an incredible appetite for growth through non-traditional means, and like a planet, it creates its own atmosphere (much like Orson Welles in his twilight years).
The 10% rebound is not attributable to any epiphanies in the world of fundamental oil. It has more to do with the symmetry of what often happens after a 25% fall - - markets bounce. The catalyst this week was the sagging U.S. Dollar, and the normal preseason climate before an OPEC meeting. The cartel meets September 9, and in this century it hasn’t been safe to be short ahead of these conclaves.
Whither To, U.S. Retail Gas Prices?
The one hundred thousand or so stations that my company tracks on the AAA site (www.fuelgaugereport.com) may make a liar of what I’m about to say, but I’ll say it anyway.
I think the largest part of the retail price drop in the U.S. is over, and we may not see more than a nickel more of price weakness between now and mid-September.
Retail gasoline prices averaged $3.707 gal today, but the difference between the price available to price hunters and the run-of-the-mill stations is nearly 30cts gal in many cities and hamlets. Five miles from my office here at the N.J. shore, I can find gasoline for $3.41 gal, but several stations on the way home are at $3.69 gal. Neither of them offers an experience comparable to shopping at Neiman-Marcus or Nordstroms, by the way.
The leading edge of gas prices may not go lower in the next 30 days. Some of the higher numbers should jog lower, however. If I were to depend on the jargon of Wall Street, I would say that “prices look congestive” rather than clear cut in the next few weeks.
I hope this prediction doesn’t sound like I’m offering a highfalutin’ hedged bet that was written by Casey Stengel or Professor Irwin Corey. On the other hand, that could lead to better career choices. Just look at famed gymnastics coach Bela Karolyi - - - his Olympic commentary has been absolutely incomprehensible (his intonations make James Brown sound like Richard Burton) and yet he seems cemented in that cushy job at NBC.
Hurricane Chicken Little
I am not an alarmist, but there are consequences when U.S. refiners don’t make any money on gasoline. One of those consequences is that refineries run less crude, make less gasoline, and most importantly, store precious little of it.
We now have considerably less gasoline in many parts of the country than we did when Hurricane Katrina struck in 2005. There is nearly 2.5-million barrels per day of refining capacity “on the shelf” but most of that shelf lies in an arc along the Gulf Coast between Corpus Christi, Texas and Pascagoula, Mississippi. If we see a major hurricane come ashore near refinery clusters in Texas or Louisiana, we will see video footage of evacuees looking for fuel. Simply put, we are as vulnerable today as we were three years ago.
If you look at gasoline inventories over the space of 25 years, you can see that “just in time” inventory practices can ultimately provoke just intolerable conditions. Some examples: In 1985, our petroleum tank farms stored about 40.5 gallons of gasoline for every man, woman, and child in America. By 2005, that amount had been whittled down to less than 29 gallons per person. Today, it stands at just above 27 gallons per individual. The sore spots in the country are the West Coast and the southeast.
Refiners aren’t to blame - - they are capitalists and carrying inventory is expensive and not particularly cost effective in August when you consider that September has typically delivered a 440,000 b/d gasoline demand drop this decade.
We’ll have enough fuel if an event doesn’t knock out a refinery or two. But cross your fingers, please.
Note: I’ll be on vacation from Friday August 22 through Labor Day, September 1.
I hope to limit my exposure to oil during that time to Oil of Olay for some beach time.