Stumbling and bumbling, but not necessarily tumbling.
With apologies to Keith Jackson, that sentence fragment pretty much describes the performance of gasoline prices in the last 30 days. You can check out all of the numbers and more at the new Daily Fuel Gauge Report that AAA launched this week in concert with OPIS at www.fuelgaugereport.com
Prices today averaged $1.922 gal, and a week ago, they were $1.94 gal; and one month ago, they were at $1.94 gal. That kind of flat movement will put me out of a job, but I have faith that we’ll see a wild, if inconsistent Spring. It may look like American Idle at the moment, but I sense that we’ll see some range (and perhaps some “pitchy” moments) in the next few months.
Accordingly, with the northern hemisphere on the cusp of the vernal equinox and yours truly on the threshold of a vacation, I hereby provide another one of those popular self-interviews.
Q. What do you expect out of OPEC in the next few days?
A. OPEC will meet, and they will talk about the need for further output cuts, and perhaps they will even agree to some further reductions. But they are about to encounter even less demand for their crude thanks to what I would call a “mid-barrel” crisis.
Refiners have been able to muddle through the Winter thanks to relatively healthy margins for the middle of the petroleum barrel – namely, heating oil, diesel fuel, and even jet fuel. As I’ve written previously, demand for these products is in drastic retreat.
Accordingly, some further refinery run reductions are forthcoming in March and April. The gross profit margin for diesel has dropped from about $20 bbl in early January to perhaps $3-$5 bbl at presstime. Lower runs mean less demand for crude.
My guess is that OPEC at best might be able to “talk up” the price of oil enough to send prices to the $55-$60 bbl range. The worst case is that we return to the previous low of $33.15 bbl. Flip a coin.
Q. Where do you see gasoline prices?
A. Gasoline is tethered to crude, but the connective fabric tends to stretch substantially in March and April. I think U.S. gasoline prices will outperform crude in the next 60 days and that might mean $2 gal gets breached for the U.S. average. But we are not looking at any strong case for $2.50-$3.00 gal gasoline or the Mediterranean-style numbers that we saw last year. We could even see prices remain about where they’ve been for the last 30 days. West Coast pump prices might drop through the rest of March since the Winter supply scare there has run its course.
Q. What about the next big move?
A. I’m reminded of the mantra of Peter Lynch of Fidelity Investments’ fame. He used to tell stock market investors that he couldn’t specifically identify direction for the next 500 point move (in the Dow) but he knew the direction of the next 5,000 point move (I hope he dropped that mantra by 2007).
I’m not sure of the direction of the next 15cts gal move, or the next 50cts gal move, and I don’t think we’ll see a $1.00 gal move at any point in 2009. The next really big move will be higher, but it may not come until 2010-2012.
Q. Has there been any particular theme in 2009?
A. Yes. The theme has been incredible volatility. There have been 49 business days in 2009 as of this post, and 14 of those days have produced wholesale gasoline moves of more than 5cts gal. The direction has been inconsistent, but the noise has been intense. And yes, OPIS has documented that even in the wild commodities’ world, the swings this year for gasoline have been more intense than in any other year. March and April tend to see volatility increase.
My fear is that January and February will compare to March and April like Marvin Hamlisch compares to John Belushi.
(Side note: If you are a baseball fan, you might think that it would be difficult to top the embarrassment levied upon Roger Clemens and Alex Rodriguez of late. You would be wrong. Some 20 years ago, Steve Garvey’s wife Cyndy left him for Marvin Hamlisch. In my view, that is still the gold standard for a sports star’s fall from grace).
Q. Do you have any explanation for the volatility?
A. The wild swings aren’t limited to oil and other commodities. A year ago, I might compare oil moves to the Dow for contrast, but now the Dow & S&P 500 routinely move in 3-4% increments as well. This is good for brokers, and good for parties that collect transaction feeds on trades, but not necessarily good for everyone else.
Q. Is gasoline demand increasing or likely to increase as we approach the driving season?
A. It has moved higher relative to January and February, but you have to go back more than 25 years to find where March did not see higher gasoline demand than the two preceding months. March and April bring less cocooning by the public, as well as Spring Break and a bit more driving. But we’re probably not driving more than we were say in March 2008 and that means there is plenty of extra production that refiners can tap if demand and margins improve. This will not be a good calendar quarter for refiners, and you’ll see evidence of that when they host earnings’ calls in April.
Q. Some people say gasoline demand is a leading economic indicator and government data says it is up from last year. Are we on the verge of recovery?
A. I believe that as much as I believe the “Banksta’ Rap” that has come from various financial CEO’s this week. Gasoline demand is still soft and unemployment continues to rise. Government demand data represents a noble attempt to measure the pulse of the American consumers, but metaphorically, it’s like taking a pulse when you are wearing oven mitts (a useless item in my kitchen, where my wife regards the concept of “cooking” as “too messy.”).
Q. What about gasoline retailers? How are they doing?
A. In the first 70 days of 2009, the average “gross” difference between the simple cost of gasoline into a station and the retail price has been less than ten cents gal. That is less than any previous year this decade. When you consider that wholesale costs have moved 5cts gal in many 24 hour periods thus far, every day is a roll of the dice for stations that purchase gasoline. A ten cents gross margin works out to about “break even” on a net basis.
Q. Are Americans likely to go back to their 2006-2007 driving habits?
A. I don’t think so. I would have said that Americans are too smart to go back to their old excessive habits, but then I saw that the two top grossing movies in the last two weeks were Madea Goes to Jail and The Jonas Brothers 3-D Concert Experience. That makes me reconsider the collective wisdom of the country.
By the way, if presented with the choice of going to a double feature of the aforementioned movies, or having root canal on my lower left quadrant of molars, the molars would rule.
Q. I’ve noticed that diesel prices continue to come down. Is it time to get that new Volkswagen Jetta or BMW 335d?
A. You will continue to see retail diesel prices drop in the next 60 days. The average national price will soon dip below $2.20 gal and there are many states where one can find diesel for under $2.00 gal.
This is an interesting product. There is no question that when world economies improve and demand growth resumes, diesel will be the fastest growing product. But it is also the product most severely impacted by downdrafts during a recession. If I was in the advertising departments for diesel carmakers, I’d concentrate all of my media buys on the last six months of 2009. There will be many states where diesel is priced below gasoline, and with the former getting much better gas mileage than the latter, it’s an opportunity to gain market share.
Q. Lower oil prices haven’t reduced Americans antipathy for oil executives. Is there anything that can be done to remove the demonic image?
A. Yes. Just sit back and let the bankers continue to strut their stuff. The CEO of Bank of America, Ken Lewis, has all of the charisma of Snidely Whiplash. When he visits New York to once again snub the state attorney general’s inquiry on Merrill Lynch bonuses, I suspect he’ll stop at a local railway and tie a young lady to the train tracks. Marketing and image guru Donnie Deutsch should take him on as a project. Donnie could be Anne Sullivan to Lewis’ Helen Keller.
Q. I read a column recently that suggested President Obama is the world’s largest energy speculator because he wants to change the policy on the Strategic Petroleum Reserve (SPR). Is that true?
A. You are referring to a column penned by oil broker Phil Flynn. You can search for the column (it was posted via Inside Futures online) and draw your own conclusions.
Personally, I think the piece is an absolutely nonsensical view of someone who has their own self interests in mind.
Let me take the opportunity to make some comments on the SPR as well as the exchanges and bourses that trade commodities, stocks, credit derivatives, etc.
Whether it makes sense to sell oil from the Strategic Petroleum Reserve to temper runaway price moves is debatable. I happen to believe that it might be reasonable to add to the reserve when prices are weak, and sell barrels when prices are excessive, but smart people can disagree on that premise.
Taking possible SPR sales off the table—a practice that was the policy of the previous administration - - was an extraordinary error for anyone familiar with negotiating postures. The threat of a potential sale of tens of millions of barrels of oil might have dangled like the Sword of Damocles over futures’ speculators, ultimately tempering the irrational and painful price heights reached in 2008.
And one more thing. The Flynn rant came soon after CNBC reporter Rick Santelli asked Chicago Board of Trade employees whether they wanted to put their imprimatur of approval on mortgage bailout programs.
The merits of the various moves made by the Federal Reserve and the Bush or Obama administrations are also debatable.
But here’s what can not be debatable. If Santelli or Flynn convince people that our country should get its moral guidance from the trading communities in Chicago or New York, we are clearly in deep deep trouble.
Q. On a lighter note, you’ve coined various words in your career that have become part of the general lexicon. Do you have any new words to describe this financial turmoil?
A. The words you are referring to are “petronoia” -- the mostly paranoid fear every year that U.S. gasoline demand is going to outstrip supply; and “pysteria” - - the more realistic fear one has after drinking a 60 ounce c-store soft drink and then recognizing that the next rest stop is 65 miles down the turnpike.
I don’t have a clever word to describe the turmoil, but I do have a thought:
Within a month, we’ll see two new baseball parks open in New York, the spanking new Citi-Field where the Mets (sponsored by CitiGroup) will play 81 games; and the new Yankee Stadium, which so far has a huge sponsorship from JP Morgan Chase but with less noticeable bank branding on the arena.
I’m not suggesting that we take away bank sponsorships at the ballparks. Instead, I’d like to take things a step further.
As taxpayers, we have funded some $160-billion in bailouts for the American International Group (AIG), all because they have a balance sheet loaded with toxic assets.
My thought: Let’s rename the Fresh Kill’s landfill on Staten Island, which was at one point the largest landfill in the world.
Until the $160 billion is paid back, I think the site should be known as “AIG Meadow”.