I have the greatest respect for learning, so the moniker for today’s blog post refers not to the pursuit of knowledge but instead to the folly of believing that those with advanced degrees or with positions of importance are immune to the pitfalls of human folly.
(Note: for those of you who don’t forever retain a sophomoric sense of humor like yours’ truly, today’s blog title references the alternate initials for the Bachelor of Science, Master of Science, and Doctor of Philosophy degrees. After my first year of college, I forever learned that those initials can be applied to the mild expletives: bull . .. ; more s….; piled high and deep).
The PhD-- or piled high and deep--component of American thinking is embedded in the thought that cheap energy will provide the tonic that rescues a sagging economy. Various economists and professed oil analysts now predict that cheaper commodity prices will get us out of his global economic mess. I sense that the cheap prices are more of a temporary “sugar rush,” but I rely on instinct and three decades of observation, and not an advanced degree.
But right now, let’s look at the early November numbers.
Retail gasoline prices on Monday averaged $2.41 gal, which means they have dropped by $1.70 gal in less than 105 days. They will be lower Tuesday, and lower when the election results have been counted (even if it takes as long as it did in 2000).
Based on the soft demand that comes with a stumbling and bumbling economy, the daily U.S. outlay for gasoline is about $916.75-million. On this day last year, we were using more fuel, and paying more for it ($2.989 gal) and the daily gasoline bill was about $1.174-billion. So, we are saving about $257-million per day when compared to 2007. (I might note that we are spending about $336-million more each day than on Election Day 2003).
But many many commentators, intent on cheering equities higher, take this daily savings and apply some sort of new calculus to the numbers. I can’t tell you how many times I have heard that a new roaring bull market for stocks is pending, thanks to the immense de facto tax cut that consumers get via cheaper fuel prices. Some observers even believe that there is no need for an economic stimulous package.
Savings of $257-million per day isn’t chicken feed, but it would take seven and one half years of Election Day 2008 lower year-on-year gasoline spending to approach the $700-billion pledged in the initial bipartisan bailout package.
Bottom Search Officially Begins . . . .
I do not believe that crude oil or gasoline prices have ever bottomed in October, at least not since contracts for those two commodities began trading in the 1980’s.
However, it has not been uncommon to see either product reach a seasonal bottom in November or December. With the exception of heating oil, futures prices for most petroleum products do tend to bottom in the November through February period.
Sentiment in oil is extremely bearish at the moment, but these sentimental extremes often signal that a bottom is near. The sentiment is spanking U.S. refiners as November begins.
In each of seven key bulk markets where OPIS tracks gasoline across the country - - New York, Houston, Chicago, Okla/Kansas, Los Angeles, San Francisco, and Seattle - - the price of gasoline sold at the refinery gate this afternoon is under the price of crude. At the U.S. Gulf Coast, refiners are paying $64 bbl for crude and getting about $56-$57 bbl for finished gasoline. That can’t last long unless refiners wish to follow the business plan of U.S. airlines.
I would compare the crude oil market to a pendulum and note that the pendulum swings wildly between a harsh 3 o’clock overvaluation for crude oil (say the $147.27 bbl number we saw in July) and an equally unrealistic 9 o’clock undervaluation for crude (hypothetically, let’s say $40 bbl). My hunch is that we have swung to the left of fair value at the moment.
The speculators provide the speed for the pendulum, and right now, the crowd is pushing numbers closer to that severe 9 o’clock valuation.
Some predictions . . .
- -Nationwide retail gasoline prices will slip below $2.25 gal nationally before this sell-off has run its course. A dozen or more states will see competitive prices slip below $2.00 gal.
- Diesel prices are also moving sharply lower, and today’s $3.235 gal average represents the first year-on-year deficit to 2007 of the year. Prices could break below $3.00 gal in the first half of November.
- If you live in the northeast and you locked in heating oil in June or July, you have my condolences. I’ll stress that the prices quoted by vendors at that time were fair, but they were in the $4.75-$5.00 gal range. Thanks to the oil price crash, homeowners can now lock in this winter’s heating oil for less than $3.00 gal. This is a market still prone to price spikes on short notice if winter degree day clusters come.
Some Final Thoughts . . .
- Remember China and its insatiable appetite for petroleum? Well, one of the best speakers that ever graced the stage at our OPIS Supply Summit (Mark Flannery of Credit Suisse) told clients today that China may see zero demand growth for petroleum in 2009, reflecting the much more severe economic downturn in that nascent economy. Note: I sensed that Chinese demand growth was regularly being overstated when I had my daughter prepare some Chinese facts & figures for an August 2008 presentation. Her research revealed that China had about one fourteenth of the storage and pipeline infrastructure as the U.S. You can’t have an insatiable appetite for oil if the distribution system is so limited.
- There is virtually no confidence these days in the information released by groups entrusted to gather data on U.S. fuel demand. The good people at the Energy Information Administration (EIA) have consistently overstated weekly demand for fuel, only to quietly adjust those numbers some sixty days later when they have more substantive data on hand. Example: EIA revealed last week that gasoline demand for August will go into the record books at 9.09-million b/d. If that number turns heads, it should - - each of the five weekly statistical bulletins issued by EIA for August weeks showed gasoline demand of over 9.4-million b/d. Put another way, EIA’s rear view mirror shows about 347,000 b/d less demand for gasoline than what was recorded at the time. Be thankful that these folks are not manufacturing contraceptives.
- By the way, there may be some confidence in trends shown by MasterCard, but there is not confidence in the mysterious extrapolation that the credit card company performs in order to reach its statistical conclusions each week. As one petroleum marketer told me, they (MasterCard) are uncomfortable with percentage moves of 3% or 6% or so. The credit card company is much more comfortable with figuring out 18.99% APR’s and the like.
- The good thing about this economic malaise, if there can be a good thing, is that it has pushed oil executives down the ladder of ill repute. A year ago, oil executives would have rivaled tobacco executives on the public enemy lists of the citizenry. Nowadays, that top slot is occupied by bankers (and lawyers who have kind of an emeritus status) and other financial engineers.