The nationwide retail price of gasoline hit $1.91 gal this morning, up nearly 30cts gal from New Year’s Eve and higher than we’ve seen since November 23, 2008. So, should we expect to see each subsequent month add 20-30cts gal to fuel prices as “reflation” grips the oil business?
In a word . . . NO. This morning’s jobs’ report underscores a problem that will continue through the quarter. Nearly 600,000 people lost their employment in January, pushing the official unemployment number up to 7.6%. The alternative unemployment index - - and no, that does not apply to laid off workers from the Arctic Monkeys, Green Day, or Weezer - - moved up to 13.9%. That larger number includes all the folks reduced to working part time as well as those who have given up in finding a suitable job.
(Observation: one nugget in the jobs’ report always gets my attention. The government says that the average work week is 33.3 hours. If my dad were alive, he would react to this data set by noting that he used to “work more than 33 hours every day.” Who are these 33.3 hour people?)
The possibility of year-on-year demand “lift” for gasoline is virtually eliminated by this recession data. At the end of today’s screed, I have attached an analysis of the very well-intentioned but highly flawed Energy Information Administration (EIA) report released two days ago. It suggested that gasoline demand rebounded some 4% last week, but I think it’s a major statistical head fake.
But first, let’s look at some numbers.
At $1.91 gal nationally, Americans are spending about $722-million per day on motor fuel if you believe recent EIA’s assessment of demand at 9.015-million barrels per day (about 379-million gallons) for gasoline. I don’t believe that number and suspect that demand is probably 10-million gal/day or so lower.
OPIS just compiled its final numbers for January 2009 and estimates that we spent $20.4-billion on gasoline last month, compared with $35.8-billion in January 2008. Five years ago, we spent about $564-million per day or $17.5-billion for the month, and that should remind everyone that we’ve boomeranged back to 2004 levels after a long, strange, and expensive trip.
Keep your eye on California
Wholesale prices for gasoline determine retail prices. That is the dictum that makes it so easy for a wholesale analyst to render reasonable predictions. Add 60cts gal or so to the local wholesale price – reflecting freight, taxes, and a modest mark-up - - and you’ll be reasonably close to the average for pump prices.
For most of the country, the wholesale price for gasoline is currently between $1.25-$1.35 gal. That neatly projects to retail prices in the $1.85-$1.95 gal range.
Let’s toss aside Alaska and Hawaii because of their unique geographical circumstances.
What’s interesting now about wholesale prices in the U.S. is that other western states - -California, Oregon, Washington, and Nevada - - have disconnected with the pricing structure elsewhere. Wholesale gasoline prices in California and other western states flirted with $1.80 gal this week, suggesting that retail prices could move to $2.60 gal or so.
Why the western disconnect? Unlike the East and Gulf Coasts of the U.S., these states don’t typically see much foreign gasoline added to the mix. So, it’s all about the local refiners, and those refiners have been trimming runs, not wanting to manufacture more product than they need in a deep recession. Those refinery cutbacks - - some related to needed maintenance, but some simply tied to economic discretion -- pushed gasoline margins for California refiners beyond $30 bbl earlier this week. The West Coast is generally the most hospitable environment for refinery operators, but $30 bbl is about thrice the average margin of 2008 and some 50% higher than gross profits during the 2005-2007 renaissance years.
Manufacturers across a broad spectrum often cut production in an effort to balance supply against future demand -- -it’s called capitalism. When this type of behavior occurs among refiners, however, it’s often not tolerated by the press or public. If western gasoline prices continue to rise, and crude oil stays flat, we will see an interesting political dynamic in the Golden State.
Speaking of Angels & Demons
These days, markets move 5-10cts gal each week and such action is no more than white noise, given the embedded volatility in the system. Last Friday, we heard a chorus of voices that suggested the U.S. could see gasoline prices soar because of likely refinery strikes.
I’ve covered the downstream oil business since the Carter Administration. In that span, I can recollect only one case where a labor action at a refinery resulted in a loss of production (Tosco kept the former BP refinery in Pennsylvania idle for about a year before eventually striking an agreement with the union about ten years ago).
Union workers have a lot to lose in these battles and they no doubt recognize that in 2009 there is a surplus of U.S. refining capacity on the shelf. Negotiators for refining companies realize that if they idled plants under current circumstances, the public image of them would slide into an even deeper interior chamber of Hell.
OPEC at the bat
Performing at 60% of perfection is terrific for a baseball average, so-so for free-throw shooting, and not so hot for the Organization of Petroleum Exporting Countries. Most recent estimates say that the cartel is adhering to 60% of its promised crude oil output cutbacks.
That 60% compliance is better than expected and probably accounts for why crude futures have held near $40 bbl, rather than retesting $33 bbl or so. Chances are that compliance could improve to about 75% in the next couple of months, according to Goldman Sachs. That would still leave the world with about 600,000 b/d more crude than it needs, the investment bank adds.
My take: there is a tendency to treat these statistical pronouncements as though they come from meters. These are highly subjective reckonings of cargo flows in all corners of the world. If we can’t keep the shipping lanes clear of Somali pirates, why should we believe that we have accurate global assessments of oil flow and storage on land and sea?
Good news for BMW, Volkswagen, Audi, Mercedes & even Ford
Gasoline prices have moved up thus far in 2009 but diesel prices have headed south. About nine months ago, the wholesale price of diesel was 50-80cts gal over the wholesale cost of gasoline. Now, gasoline and diesel fetch about the same wholesale numbers east of the Rockies, and western diesel costs have moved 20-30cts gal below gas. Diesel taxes are more than 6cts gal higher than excise taxes on gasoline, so the fuel starts with a disadvantage.
I suspect that before Easter Sunday, we may see diesel pump prices beneath gasoline prices in a number of states. We certainly aren’t going to revisit the $5 gal numbers from last year when diesel regularly sold for $1.00-$1.50 gal above unleaded regular.
The reason: diesel’s surge in 2008 was all about the rest of the world and the demand for diesel to power generators, facilitate mining, plant more crops, and move people in countries that use diesel-fired vehicles (e.g. Europe). Those global cylinders are sputtering, and U.S. demand for commercial vehicles is probably down by 10% or more.
The United States of Bizspeak
U.S. refinery executives brutalized all grammatical forms of the word “challenge” in earnings’ reports issued in the last two weeks. If I hear one more time that conditions are “challenging,” I may put on an Evander Holyfield mask, smear bacon on my ears, and seek out an angry Mike Tyson.
Similarly, I saw yesterday where Rupert Murdoch’s News Corp lost billions and noted in a press release that it would be “reducing the head count.”
As tragic as it may be, I hope that means that people are getting furloughed, fired, or put on leave, and not murdered. Considering some of the violence in Fox films, you never know.
And my favorite case of bizspeak last week came via the Sun earnings’ report. In the press release, the company didn’t come right out and say that it would be selling about 150 retail stations. Instead, they reported that the stores would go into their “retail portfolio management program,” where guess what? They’ll be sold!
Plain speaking needs to make a comeback. I suspect the kids on my block may set up a lemonade portfolio management stand this summer.
Sadness in the ethanol patch
Verasun, the once mighty renewable fuel company, will be auctioned off before March is over. If you think that the executives who ran this company were guilty of excess or greed and bore a resemblance to the Gordon Geckos and Bernie Madoffs of the world, you are wrong. The company fell victim to some big losses tied to commodities’ swings, as well as overbuilding throughout the industry.
Some refiners may buy some assets, not so much because they are green with envy, but because they need to blend ethanol or will be forced to pay for de facto credits from other companies that make or add ethanol to fuel mixtures. Valero is mentioned as a possible buyer.
So is the Midwestern renewable company named POET. I won’t lapse into a limerick here, but will say that Verasun was the victim of tragic pastoral verse. In the end, they need to compose an Ode to the banks and corn growers.
The trouble with retail gasoline margins
I love Costco. Their meats are as savory as the best cuts one finds in New York, Boston, Chicago or San Francisco. I don’t purchase my suits there, but I love the treasure hunt concept and the no-nonsense return policies.
Wall Street analysts this week said they were broadsided by news that the mega-retailer would release earnings one month from now that will be “substantially below” expectations. Weak gasoline profits were cited as one of the major culprits behind the disappointment.
No one should have been broadsided. Shameless plug: if they subscribed to OPIS, they would have recognized that the retail price for gasoline at some 280 Costco fueling centers this quarter has been about 0.1cts gal above average costs, freight, and taxes. In Autumn, that difference was 17.4cts gal. With typical gas sales per site in the 300,000 gal/month or higher rate, Costco was making perhaps $50,000 per month per location a few months ago, and fuel contributed as much as $42-million per quarter. At current numbers, you’d be hard-pressed to come up with $1-million in gross profit for the same period.
This isn’t a criticism of Costco. It’s testament to how tough it is to make money in the retail gasoline business.
Odds & Ends
- - The furor over speculative and investment participation in commodity markets is heating up again. I believe that the various marketmakers, speculators, investment funds, and algorithmic traders all account for a huge majority of the daily volume in energy futures. But I differ from those who say there should be bans on such participants. I would compare these folks to the flora one finds in the large intestine. You need many types of bacteria and microorganisms to maintain a healthy fluid system. Too much bacteria leads to too much movement, if you know what I mean. Too little bacteria and the system seizes up.
- Indian refiner Reliance Industries just opened an office in Houston, Texas. They have a 580,000 b/d export-only refinery that will be able to manufacture the cleanest specifications of U.S. and global fuels. Those barrels are a couple of months away. The resumes from out-of-work traders and marketers will hit Houston this month, however.
- As I write this, I am drinking some Green Mountain coffee. Forgive me if I’m wrong, but I didn’t think there were any coffee plantations in Vermont. I feel inspired by the antithetical aspects of the name and product. Next month, I will be introducing Staten Island Spring Water.
JANUARY GASOLINE DEMAND MAY BE LOWEST IN SIX YEARS
Mark your calendars for late March. That’s when you might expect to see January 2009 demand numbers revised lower to what could be the weakest winter month for motor fuel sales since 2003. It would be an extraordinary comparison, considering that U.S. population has grown by about 15 million to 17 million people in that time, depending on the estimates you choose.
But there’s been a clear precedent in Energy Information Administration (EIA) data in recent years. EIA’s weekly numbers have consistently been riddled with overestimation of demand, whether for gasoline, diesel, or for all petroleum products.
Last week, for example, EIA published its final figures for November 2008. Gasoline demand for that month was recorded for posterity at 8.845 million b/d, about 90,000 b/d below the figures originally reported in each of the weekly statistical bulletins for November dates. December data will be posted in late February, but ten of the eleven final monthly records for 2008 gasoline demand saw an eventual downward recalculation, in one case representing nearly a variance of 4.5%.
In a business where small variations in supply and demand can create huge price movements, the constant revisions are a bit unsettling. During the early part of 2008, chain marketers and fuel suppliers often complained that they thought EIA, API, and even MasterCard SpendingPulse were all guilty of overestimating demand and underestimating demand destruction. From May through July 2008, anyone looking at weekly EIA data might have erroneously concluded that four-week demand trends showed decreases of just 0.4% to 2.4% from the same period in 2007. Once monthly data was recorded, the demand destruction hit 3.23% and it eventually climaxed with a 398,000 b/d or 4.49% loss for September.
2008 EIA DEMAND NUMBERS
Month Initial Demand Est. Actual Demand B/D Difference % Change
--------- ----------------------- ------------------- ----------------- -----------
January 9.081-mil b/d 8.814-mil b/d -267,000 -2.94%
February 9.035-mil b/d 8.842-mil b/d -193,000 -2.14%
March 9.162-mil b/d 9.069-mil b/d - 93,000 -1.02%
April 9.257-mil b/d 9.117-mil b/d -140,000 -1.51%
May 9.303-mil b/d 9.216-mil b/d - 87,000 -0.94%
June 9.338-mil b/d 9.071-mil b/d -267,000 -2.86%
July 9.375-mil b/d 9.072-mil b/d -303,000 -3.23%
August 9,438-mil b/d 9.090-mil b/d -348,000 -3.68%
September 8.867-mil b/d 8.469-mil b/d -398,000 -4.49%
October 8.960-mil b/d 8.986-mil b/d + 26,000 +0.29%
November 8.935-mil b/d 8.845-mil b/d - 90,000 -1.00%
December 9.041-mil b/d - - - - - -
An average of the four EIA reports issued for January 2009 yields a gasoline demand figure of 8.759 million b/d. The average downward revision in 2008 was approximately 175,000 b/d. Hence, an average revision would result in a monthly number of 8.584 million b/d and that would be the lowest recording for January since 2003 when demand was calculated at 8.414 million b/d.
Despite the huge disconnect between weekly and monthly figures, most marketers respect the task of EIA and don’t castigate the government group for poor record-keeping. Among executives who have worked at refining and terminaling companies, there’s recognition that weekly compliance with DOE surveys is not a priority.
However, the major flaw may be the means by which EIA has to calculate an implied demand figure each week from refinery output, extensive gasoline blending operations, the occasional export, and the disappearance or accrual of inventory. Stocks of gasoline can be drained quickly from terminals if distributors are expecting a stiff price increase, and tank farms can be virtual ghost towns if marketers are aware of imminent decreases.
“All of my dealer customers are essentially ‘day traders’,” one southeastern marketer observed, adding that morning loads of fuel are routinely cancelled when it’s clear that spot prices are headed lower.
Distillate demand is even more difficult to calculate but there too, on-the-field sources suggest that EIA numbers may be inflated. Reports of diesel demand destruction of over 10% versus 2008 data persist.
That said, here are some other interesting statistical tidbits from the final January-November numbers that have been recorded:
- Total petroleum demand in November 2008 fell by 7.7% or 1.577 million b/d. That is the lowest demand level since 1998 when crude oil prices were in the $10-$12/bbl range. This aggregate number reflects a 1.6% revision from the preliminary weekly data reports.
- Exports of distillate hit their highest level ever for an autumn or winter month. U.S. companies exported 544,000 b/d of distillate in November, or some 16.3 million bbl and most of it was destined for Europe.
- The 6% decline in overall petroleum demand during the first eleven months of 2008 represents the biggest percentage slip since the Carter Administration.
- The apex of all-time U.S. gasoline demand is the 9.622 million b/d figure recorded in July 2007. A 10% increase from current levels would be needed to flirt with such a number in 2009.