One of the seminal pieces of English fiction I read in sixth grade was a short horror story called “The Monkey’s Paw” by W.W. Jacobs. The title refers to a talisman that brings three wishes to the bearer, but each wish comes at a price which the recipient of the paw would have turned down had he known that was part of the bargain. (If you haven’t read the story, I’m sure you can find it in the ether world in text or audio form)

     What has happened in U.S. oil markets this October reminds me of that story. Anyone hoping for a smaller carbon footprint might celebrate that U.S. petroleum demand is now considerably lower, but the wish hasn’t been granted in response to a sensible bipartisan move toward less conspicuous and excessive consumption. Similarly, consumers will see their collective wish for lower fuel prices granted in the coming days and weeks, but the downtrend is not related to bold energy policy or any much-needed sacrifice by the American population.

   Welcome to the macroeconomics of oil. Earlier this year, I noted that many Wall Street traders had pursued a sell equities/buy commodities strategy which worked well for many May and June weeks but represented an anomaly when viewed from an historical perspective. Stock indices such as the Dow Jones Industrial Average or the S&P 500 do not move inversely to crude oil prices over time --  they don’t necessarily move in lockstep, but it ultimately takes strong economic numbers to accelerate fuel price inflation.

   Conspiracy theorists will soon have a field day. This month will bring the first year-on-year decreases in retail gasoline prices since 2006 (at some point in October, what you pay will be less than what you paid on the same day in October 2007).  There will be widespread and erroneous conclusions that some behind-the-scenes puppeteers are manipulating the strings so that gasoline, diesel and heating oil prices are more palatable as Election Day comes around. 

   If only it were that simple. Those puppeteers clearly don’t have the ability to multi-task. If they did, we might be seeing higher stock prices, wider credit availability, and a more optimistic view of what the rest of the decade might deliver.

   Oil prices are lower because the global economy stinks, and there is no good news in sight to disperse the fetid and rancid odor that Wall Street, Main Street, and even Martin Scorcese’s Mean Streets have delivered this year.

Some Numbers and Observations . . .

  - -  As a journalist, I’m trained to find irony. There is plenty of irony in today’s retail gasoline price (www.fuelgaugereport.com) which kicked off the first Monday in October at $3.504 gal. That works out to $147.17 bbl, which just happens to put it within 10cts bbl of the all time high water mark for WTI crude oil futures hit less than 60 days ago. Today’s crude oil price settlement was $87.81 bbl, so we’ve backed off by nearly $60 bbl from the drunken peak.

  - - No gasoline demand rebound is likely this quarter. We may see the occasional rogue level of 9-million bbl per week in the fourth quarter, but my bet is that statistical demand will continue to be some 3% to 5% below last year. I would note that most of the government extrapolations and the investment banking extrapolations are based on a non-recessionary environment, not just in the fourth quarter but clear through next year. So, be on the lookout for an EIA or Goldman Sachs’ or even a Morgan Stanley mulligan.

 - - Today’s numbers for demand (8.7-million b/d most recently) and price ($3.504 gal) work out to a daily consumer outlay of about $1.28-billion for gasoline. It would take a drop to about $2.75 gal to push prices below the $1-billion per day level. I don’t think we’ll get there on a national average basis, but I wouldn’t totally rule it out.  For perspective, we are still meting out at least twice as much per day in fuel payments as we were during any of the last few recessions.

  - Cut to the chase. I believe that $3.00 gal or less at the pump will be a common price within the next few weeks. I base that not on any talisman, charms, or witchcraft, but instead on a view of current wholesale prices. The price of wholesale gasoline is down by $1.00-$1.35 gal in most parts of the country since mid-July. That will soon be passed along. Wholesale gasoline today was worth as little as $2.04 gal at the Gulf Coast (down from a midsummer $3.30 gal or so) and the most expensive market (California) could muster a price no greater than $2.46 gal for gasoline. The rule of thumb is to take these wholesale prices and add about 60cts gal in order to extrapolate (or perhaps . . . .concoct) where retail is heading. We’ll see more than a dozen governors welcome $3.00 gal or less fuel prices this weekend in states that include but are not limited to Texas, Arkansas, Oklahoma, Delaware, Missouri, Kansas, and New Jersey.

   - - The worst of the supply problems in the southeast and the Gulf Coast are over. And if you wonder whether consumers “topping off their tanks” can have an impact, consider this statistic. When Hurricane Ike rolled on shore, southeastern states had perhaps twelve gallons of gasoline per population member, thanks in part to the impact of Hurricane Gustav, but thanks mostly to just-in-time inventory practices. Let’s hope that we don’t see any further landfalls in the last 55 days of hurricane season.

     So, if you are delighted to see fuel prices some 50cts gal or so below current levels, you may be happy with this forecast.  You should also note that deflation is at work in other lifeblood commodities like Corn - - it traded for $4.25 bushel today or about $3 bushel or more below Spring peaks.