The combination of the words “zig” and “zag” in a headline will probably result in many misguided search hits from stoners and slackers shopping for rolling papers. If you fit either category, read no further. If you don’t, there may be some wisdom in the Q&A that I’ve posted below.
Some fifteen days into 2009, the oil markets have been entirely vertical. Under normal circumstances, I would describe oil prices as bipolar, but the performance so far has been downright schizophrenic. That mien may continue - - there are different wind currents at work in crude oil, gasoline, and diesel markets.
The following are some sensible questions to address what’s happened so far in 2009, what is likely over the near term, and what may happen some six to twelve months from now. The opinions expressed are my own, although I get to steal from some of the best (and worst) analysis from investment banks, trading companies, and pompous and non-pompous economists. You know who you are.
Q. Crude oil futures prices briefly surpassed $50 bbl on January 6, but traded for as little as $35.40 bbl on January 15. What gives?
A. There is a tradition of false starts or pyrite rallies most years. This year is no exception, and if anything there is plenty of evidence that indicates the U.S. and the world is close to the “Full” setting on the crude oil tank gauge. There’s been very brisk trading and the collective “market” sentiment continues to waver as it considers fears about deflation, inflation, and my favorite new buzzword, reflation.
Q. What about OPEC? They promised a production cut in December and now they are talking about a March meeting?
A. OPEC traditionally does not cooperate very well when prices are unstable, and that goes for bear as well as bull markets. History shows that it takes 4, 5, or 6 OPEC meetings and considerable pain and sloppiness in the markets before the cartel exercises enough discipline to stem a downturn.
Q. Retail gasoline prices ran up about 20cts gal from December 30 through January 15? Can we expect that trend to continue?
A. No, not yet. I do believe that the $1.616 gal national average OPIS recorded on December 30, 2008 is probably the lowest price we’ll see until next Fall. But it would be wrong to conclude that fuel prices are going to climb by more than a penny per day in the rest of January, or February and March. The next 45 days present a very hostile environment for a price surge.
Q. Why have gasoline prices disconnected with crude? One (retail unleaded gas) is up, while the other (crude oil) is down. What’s the deal?
A. It’s not so much that gasoline has moved up in the last week - - it’s more of a disconnect because crude oil has move down. Think of Tom Cruise and Nicole Kidman during their marriage. Tom might wear modest lifts, but Nicole would slouch so photos wouldn’t make it appear as though she could eat soup off his head. Crude oil is slouching toward $30 bbl, and gasoline is pretty much standing still these days.
Retail Nationwide Lows – 2000 through 2008
Year Low Unleaded Price Calendar Date
2000 $1.287 gal 1/14
2001 $1.077 gal 12/18
2002 $1.067 gal 1/1
2003 $1.459 gal 1/1
2004 $1.484 gal 1/1
2005 $1.763 gal 1/6
2006 $2.205 gal 1/1
2007 $2.143 gal 1/29
2008 $1.616 gal 12/30
Q. Isn’t CNBC’s Larry Kudlow a prophet when he suggests that cheap gasoline is a “mustard seed” that will eventually lead to a robust economic recovery?
A. I think Mr. Kudlow has poupon in his pants when it comes to this issue. Yes, fuel prices are some $1.30 gal or so below where they were a year ago, but for the average driver, that adds up to savings of about $65 each month. Meanwhile, the average home, according to the Case Shiller Index, has lost about 18% of its value in the last twelve months, or about $2,333 per month. One would have to drive a Winnebago several times around the world (not possible without an Asia-to-Alaska land bridge) these days to save as much on fuel in a month as one is losing on real estate.
Q. How does demand look?
A. Demand for crude oil is perceived to be very weak across the globe, but it’s perked a bit in the U.S. only because the price of crude is so cheap compared to the price refineries can now get for gasoline and diesel. We may well see something in the $30 bbl range, or even lower, in the next few weeks. But longer term, $30-$40 bbl is too low, given the costs of producing say the most expensive 5-million or 20-million barrels per day of global crude.
Demand for gasoline recovered a bit from Thanksgiving through Christmas, but it has subsequently fallen off. Some of this can be attributed to “cocooning” - - people tend to cut back on “got-to” travel in mid-January when the weather turns nasty and the bills from the holidays have rolled in. (Note: if Christmas expenses alone accounted for the cocooning phenomenon, my wife would have a cocoon reminiscent of the one featured in the 1961 classic Japanese film, Mothra).
Demand for diesel fuel often gets overlooked. The various entities that measure oil statistics bundle diesel demand in with other “distillates.” So, you can’t really separate highway diesel demand from demand for heating oil or off-road diesel for mining and other purposes.
I wrote a story for this week’s Oil Express where I noted that U.S. diesel demand is currently some 10% or more below January 2008 levels. If you have been on an interstate lately, you might notice that there are far fewer 18 wheelers, let alone any commercial convoys, on the road.
Note to investors and amateur economists: In 33 years of financial reporting, I’ve concluded that gasoline demand is often a lagging indicator. Diesel demand is a leading indicator. The diesel demand numbers that were shared with me this week suggest that much more tough times are ahead for the U.S. commercial and industrial economy.
Q. What do you expect in the next 15-45 days for oil and gasoline prices?
A. I do believe that we will see the bottom for crude oil prices. It may occur as early as Inauguration Day when the near term crude oil futures’ contract expires on the NYMEX.
As I mentioned previously, retail gasoline prices probably hit their off-season nadir on December 30. But there will probably be another round of price weakness in the next 30 days. This typically happens when midwinter demand disappoints (as it usually does) and the downstream distribution system has to purge its Winter blends of gasoline to make way for less volatile Springtime blends. The industry has to give itself an enema every year, and that is never accomplished without some discomfort.
Q. So far, you haven’t used any sports’ metaphors. Can we read one that is appropriate?
A. Glad to comply with that request. There are less than 30 days until pitchers and catchers report for Spring Training.
Look at the petroleum market like a baseball team. Refinery output, global crude oil production, and investor sentiment are like the three, four and five hitters in the lineup.
The pitching comes via the macroeconomic backdrop and global demand. Refiners can cut production, and oil exporters can try and rein in output, but none of that will mean much if worldwide demand is on the downslide. The most dismal economic circumstances of my lifetime give our current metaphorical petroleum baseball team the pitching staff of the 2008 Texas Rangers.
Q. Any suggestions on how to determine when the American consumer has hit rock bottom in terms of sentiment?
A. My guess is that consumer confidence has crept lower this month, even though fuel prices are lower, and food, clothing and other staple items are on their way to lower prices as cheap oil works its way into the system. Another dose of damage to the consumer psyche was rendered during the first half of January as retail gasoline climbed above $2.00 gal in some areas (California, Chicago, e.g.)
Consumers are impacted by gasoline prices the way I was affected by the Giants crushing loss to the evil Eagles. I had no money on the game, and don’t hang out with any of the players, and do not have any personal wealth or well-being tied to their performance. And yet, this has been a difficult week, and I have felt a bit surly and annoyed since the loss.
Americans have been conditioned to feel the same way when they see pump prices move up. The increases since New Year’s weekend amount to perhaps $10 of additional cost per month. It’s annoying nonetheless.
Q. How will we know when the global economy is about to be revived?
A. My best guess is that a bottom in housing - -the great ATM and piggybank of the spendthrift 2003-2007 period—will signal a forthcoming recovery in other segments.
Short of that metric, a deposit in a numbered Swiss bank account made out to my name will do.