Some crude oil prices actually dipped below $30 bbl today. Futures’ prices were in the mid-$30’s, but some heavy sour grades trade at a substantial discount to WTI futures. Meanwhile, retail gasoline prices edged up 0.3cts gal to $1.673 gal. An eighty six day unbroken string of day-to-day decreases ended last Friday, and we’ve moved essentially sideways ever since.
Recall that spot gasoline prices dipped into the $30’s even before crude oil breached $40 bbl. Crude oil has zigged lower, while wholesale gasoline has zigged slightly higher through most of the last ten days. That pattern may continue until year’s end. The biggest zig, incidentally, has been on the U.S. West Coast.
An Interesting Over/Under Bet
Despite crude oil prices of $100-$145 bbl for two thirds of 2008, it looks as though oil will conclude 2008 and not do so with an average yearly price of $100 bbl or more.
If a $100 bbl hypothetical was posed in June or July, most people would have thought a double digit annual number to be silly, since prices then were in the $135-$145 bbl neighborhood, and top investment banks were trumpeting the possibility of $200 bbl.
But now, against the backdrop of a dip to the mid $30’s, the $100 bbl question might be a long shot wager in the sports’ betting parlors of Las Vegas or Reno. Heading into the last two weeks of 2008, WTI crude oil futures have traded for as much as $147.27 bbl and as little as $33.44 bbl (witnessed this morning) and through yesterday, the average futures’ settlement in 2008 has been $101.75 bbl. .
Crude oil needs to average nearly $52.50 bbl in the last 13 days of 2008 for the annual number to hit three digits. It’s still possible, but I’d bet against it.
Here’s how the crude numbers, and the street price averages shape up through December 18, 2008. I’ve included previous years because the additional data really gives some perspective on the extremes that 2008 has delivered. We’ll fall short of $100 bbl for 2008, but crude’s cost will still be about four times the 2001 and 2002 numbers.
21st Century Oil Prices
Year WTI Crude Retail Gasoline Retail Diesel
2000 $30.15 bbl $1.5008gal $1.5548 gal
2001 $26.14 bbl $1.4397gal $1.4926 gal
2002 $26.15 bbl $1.3497gal $1.3746 gal
2003 $30.99 bbl $1.5587gal $1.5833 gal
2004 $41.47 bbl $1.8427gal $1.8611 gal
2005 $56.70 bbl $2.2654gal $2.4779 gal
2006 $66.25 bbl $2.5667gal $2.7852 gal
2007 $72.41 bbl $2.7892gal $2.9581 gal
2008 -YTD $101.75bbl $3.3057gal $3.9581 gal
OPEC’S Miserable Attempt at “Spin”
The way the OPEC pledge was handled this week, one would think that OPEC hired James Carville and Mary Matalin as spin doctors. The cartel cited a 4.2-million bbl cut in production, which initially got the oil market all worked up. That lasted all of about fifteen minutes. The spin didn’t work - --analysts quickly figured out that the 4.2-million bbl number included all of the “pledged” cuts from September forward. The hidden headline number was the 2.2-million b/d promised for early 2009.
If I had an engineering background, I would go to work immediately on developing an OPEC Slide Rule. (First, I would pursue the challenge of developing a new airline beverage cart. Engineers of the world need to unite before my knees are rendered Joe Namath-like by the constant hammering of Continental flight attendants).
The slide rule might use an algorithm that could calibrate the cheating. The lesson of the last 40 years with the cartel is: the greater the pledged cut, the greater the cheating. Or to use the term that OPEC ministers have resorted to in the past, some OPEC members “leak” oil.
I’m reminded of a quote attributed to Henry Kissinger. “I don’t give leaks, I take them,” he was reported to have once said. My guess is he made that statement just before returning to the Paris Peace Talks where he then argued for days about the shape of the table.
Demand Guesstimates ….
This is the time of the year where the analytical community in oil feels compelled to make projections for 2008 global demand. I feel no such compulsion, and limit my prognostications to the U.S. borders.
There is nothing remotely resembling a consensus among those that do attempt to predict 2009 demand. The Paris-based International Energy Agency has gone on record and suggested that global oil demand will grow by 400,000 b/d in 2009. The U.S. Department of Energy forecasts that global oil demand will fall by 450,000 b/d in 2009. Deutsche Bank believes that oil demand will contract by 1-million b/d in 2009. Goldman Sachs, which had the most extreme view of oil’s upside earlier in 2008, now believes that global oil demand will decline by 1.7-million b/d.
I tend to believe the Deutsche Bank and Goldman Sachs’ projections will be closer to the mark than the IEA and DOE.
But recognize that all of these forecasts are rendered with instruments that are faulty. Gauging current or even past world demand for oil is akin to cutting your hair with a chain saw. The results are uneven and often unpleasant. Once you get out of the United States and Europe, the quality of the global data on energy production, demand, and inventory often represents wishes and whimsy, and not due diligence.
I’ll limit my prognostication to 2009 gasoline demand for the first two months.
We’ve learned in 2008 that swings of 2-3% in demand for the marquee product –gasoline - - can have an exponential impact on the price of crude and products. We’ve also learned that government data sets are equivocal, and less than absolute.
Gasoline demand in January 2008 was 9.08-million b/d, if you choose to believe the weekly EIA reports. If instead, you look at the adjusted monthly recorded number, gasoline demand was just 8.81-million b/d.
I believe that the first 40 days of 2009 will represent something like a death march for consumption. When the ultimate numbers are calculated, U.S. consumers will probably use no more than 8.5-8.75-million b/d of gasoline, or in gallons, some 357-million to 368-million gal per day. It will be difficult for prices to stage any meaningful rally until late February and March under these circumstances.
A Few Moments With Andy Rooney.
CBS icon Andy Rooney had an interesting segment two weeks ago. Mr. Rooney detailed his own money-saving methods, and that included a novel means of buying 89 octane gasoline - -often referred to as midgrade. Andy, bless his thick eyebrows, pulls his vehicle into a station and purchases 10 gallons of 87 octane regular at say $1.60 gal, and then buys 10 gallons of 93 octane premium for $1.90 gal.
Total cost: $35.
Had he instead purchased 20 gallons of 89 octane midgrade at the typical price of say, $1.80 gal, he would have paid $36.
A couple of elements about Mr. Rooney’s revelation strike me as odd. One is that he would go to such lengths to save a dollar. Secondly, if he is indeed this penurious, and he has any knowledge of the linear nature of gasoline blending, he should have calculated that he needed less than eight gallons of 93 octane together with 12 gallons of 87 octane to accomplish his feat, and he would have saved an additional 60cts or so.
However, my true interest is whether or not he paid by credit card. If he used Visa, or MasterCard, or American Express, he would have generated two separate transaction fees on each purchase, thereby fattening the coffers of the banks to the detriment of his local retailer. Say it ain’t so, Andy!
End of the Big Inning
From late September through November, I noted that gasoline retailers enjoyed a “big inning” with daily profits often 3-6 times the level witnessed in the miserable first six months of 2008. The observation wasn’t a criticism - -I’ve noted that the business of making money on a c-store is challenging even during the best of times. With Americans spending less inside-the-box, it’s particularly challenging.
That big inning has ended. And to beat the metaphor to its appropriate pulp, the inning has ended as though top baseball closers Goose Gossage, Rollie Fingers, and Mariano Rivera combined to end any threat of a further rally. Gasoline retailers now face the prospect of little pricing power for passing along wholesale increases, and with year-on-year sales likely to slump into 2009.
Back To Earth
Americans obsess about gasoline prices because the numbers are in-your-face every day, and vary so much from town to town and state to state. But very quietly, this oil price crash has delivered some incredible relief for commercial airlines.
The average cost of commercial airline jet fuel commenced 2008 at $2.80 gal. It eventually spiked as high as $4.26 gal just before the 4th of July. Today, that price averages about $1.38 gal, and that is the lowest number since February 17, 2005.
Airlines might argue that the first three years of the decade produced average jet fuel costs of well under $1.00 gal, but I would argue that they should soon afford to put more than six miniature pretzels in those Eagle Snack packs on board domestic flights.
Two Buck Chuck & OPUS One
I’m often asked about the average cost of bringing a barrel of “vanilla grade” crude to market.
There is of course no such animal, but there is incredible diversity across the wellheads on or around six continents. If you watched 60 Minutes a few weeks ago, you might recall where the Saudi Oil Minister Ali-Naimi noted that the Kingdom’s average cost of crude was less than $2 bbl.
At the other extreme, you have difficult projects in the Canadian tar sands, etc., where the break-even costs are estimated at closer to $50 bbl.
It’s ridiculous to talk of averages when there are such wide differences in easy-to-find oil and hard-to-extract crude.
It’s a bit like asking for the average cost of a bottle of red wine. You have your “two buck Chuck”, which I’ve tasted and found to be reasonably satisfying if not overwhelming. Then, you have your expensive OPUS One, where the cost is apparently measured in hundreds of dollars per bottle.
I work for Oil Price Information Service, which of course is widely known as OPIS, and I’ve never enjoyed a bottle of OPUS One.
Are you listening Baroness Philippine de Rothschild or Robert Mondavi? You just got a plug, and you owe me.