Gasoline prices in the first 21 days of 2009 rose 23.1cts gal nationally, but don’t panic, or start calculating premature “at this pace” adjustments on your calculator.
Yes, if one applied the three week pace to the next 49 weeks, the U.S. would face a December 31, 2009 pump price of about $5.60 gal, more than $4.00 gal above the $1.616 gal number that we saw at the end of 2008. I’ve gone on record as suggesting that the end-2008 number represents a number that we’re not likely to revisit for most, if not all of 2009, and I stick by that prediction.
But we’re also not on the verge of another assault on $3.00 gal. Let’s crunch some numbers.
The statistics released by the Energy Information Administration (EIA) this week imply the lowest gasoline demand since September 9, 2005, which corresponds to the peak demand destruction rendered by Hurricane Katrina. EIA suggests that Americans used about 363-million gallons per day of motor fuel last week. It’s the lowest number for January in five years, and one has to believe that the number of licensed drivers has crept up several million people in that time frame. All of the statistical and anecdotal evidence points to little discretional driving by the motoring public. Almost all of the consumption we see is mandatory—related to work, trips to acquire staple items, visits to the unemployment office, pursuit of Ponzi scam artists fleeing the country, etc.
The reduction in driving really doesn’t have anything to do with discipline, conservation, or the new era of responsibility that President Obama called for in his inaugural address. It also has little to do with any movement toward a more efficient fleet or car pooling. It has everything to do with job losses, the slide in consumer confidence, and the ongoing spiral in perceived and real wealth.
But measured from peak to trough over the last two years, there are some interesting comparisons. In mid-July 2007, Americans were consuming about 408-million gal of motor fuel each day. I suspect that the bottom of this demand cycle might see an overall cut of about 50-million gal/day.
Footnote: This week saw MasterCard decide that it would no longer share its extrapolated data on gasoline demand at the pump. Like most data sets, I thought the numbers were ultimately flawed, since the plastic processor would only reveal that it had a secret proprietary extrapolation formula so it could estimate all gasoline sales from the subset that consists of MasterCard purchases. That process always reminded me of President Nixon’s secret plan to end the Vietnam War.
MasterCard this week decided that it would be willing to share the data, but only to subscribers who paid $20,000 for the weekly numbers. MasterCard certainly knows what the word priceless means, but they have a clear problem with the concept of free.
Some Historical Numbers
To break up the monotony of the prose, here’s a look at how the lower consumption, and in some cases lower prices, translates into cost savings or additions for the American public:
Year Dollars Spent Daily on Gasoline
2009-Current $671-million
Jan 23, 2008 $1.123-billion
Jan 23, 2007 $824-million
Jan 23, 2006 $868-million
Jan 23, 2005 $685-million
Jan 23, 2004 $573-million
Crude and refined thoughts
Thus far in 2009, WTI has been a very poor indicator of downstream fuel markets. Crude gets aggressively sold as futures’ contracts approach expiration dates and then recovers handsomely when those deadlines disappear.
It’s clear that WTI futures are more entrenched than ever as an abstract proxy for global economic conditions. Trading volumes have soared in recent weeks, and price swings have mimicked action in key stock indices. If the S&P is rallying around the 2:30 P.M. EST settlement for futures, there’s a good chance that crude oil is surging as well and vice versa. If the morning’s economic news is gloomy, that translates into a gloomy A.M. for WTI futures.
In some cases, this has been reflected in bizarre relationships among grades of crude. For a brief period last week, prices for some heavy sour grades of crude traded at a premium to light sweet WTI. This is a bit like a pedestrian merlot selling for a premium to Opus One (I’ve always wanted to write something that gives the illusion that I am sophisticated and debonair and a wine snob, even though my formative wine tasting years consisted of chugging Giacobazzi in a brown paper bag).
Gasoline and diesel prices have marched in a much less predictable fashion. Both fuels would appear to be compromised by soft global economic activity, but refinery profits these days hinge on whether WTI is sharply higher or lower at the moment.
For all of the wild intraweek volatility, a two month perspective yields what might be considered to be a trading range. Since crude oil futures settled below $50 bbl on December 1, they have occasionally dipped to about $33 bbl or less, and had a cup of coffee briefly above $50 bbl. There’s no sign of a breakout through these floor/ceiling numbers.
Refinery margins have depended in large part on the swings between $33 bbl and $50 bbl. When the February crude oil contract expired, some refiners briefly saw $14-$17 bbl gasoline margins. Once the expiry-related selling was done, WTI recovered and margins slipped back below $5 bbl.
The lack of consistency sets up an interesting remainder for the first quarter. Refiners are neither fortune tellers, nor public utilities. All of the evidence suggests that processors will err on the side of overestimating demand destruction and cutting more discretionary output in February and March.
In theory, those lower runs should point toward U.S. crude values revisiting prices toward the bottom of the $33-$50 bbl range. But the performance of the S&P, Dow, NASDAQ and U.S. Housing will also have a huge impact on WTI prices and other assessments.
If refiners overreact, it could set up some contentious exchanges between the industry and the public. Consumers have looked at the rise from $1.616 gal to $1.85 gal and concluded “here we go again.”
Odds & Ends
- Very impressive advertisements made their debut in recent weeks. The TV ads that I’ve witnessed do a good job in educating the public that new European style diesel-fueled cars have a much smaller carbon footprint than traditional gas-fired cars, and the mileage is equal to or more outstanding than many hybrids. The BMW ads seem particularly snazzy. As someone who watched every episode of Hogan’s Heroes, I can’t get past the exaggerated German accent for the Volkswagen ads and give them the same kudus.
- One oil company, ConocoPhillips, announced broad layoffs last week, and many more cutbacks from other firms are forthcoming. Many of the public companies will detail these staff cuts during the first ten days of February when CEO’s comment on disappointing fourth quarter 2008 earnings. Like other cyclical businesses, the oil industry goes through regular purge & binge processes. The 2009 purge will be the most substantial such episode since the 1998-1999 oil price crash.
- I’ll be delivering a keynote at the OPIS Fuel Price & Profitability Outlook this Monday morning in Orlando, Florida. Unlike many other analysts, I won’t give an outright projection as to where crude oil or gasoline prices may be when 2009 ends. That would be witchcraft. I do, however, plan to visit Disney and suggest a new ride that integrates an oil adventure with traditional entertainment - - - I hope they appreciate the “Somali Pirates of the Caribbean” outline that I’ve assembled.