I haven’t posted comments in this space since March 30, and for good reason. April was oil price pancake month. Retail gasoline prices, which anger the teeming U.S. masses the way the Jonas Brothers raise the hackles of yours truly, spent about 40 days between $2.00 gal and $2.06 gal recently. They just surpassed $2.12 gal - -we calculated them for www.fuelgaugereport.com at $2.141 gal this morning - - hence, the reference to the boiling point in the title. To be blunt, there wasn’t much to write about in the last 40 days, but there are some interesting dynamics at work at the moment.
How can I predict with any certainty that we’ll soon see the highest motor fuel prices since mid-November 2008? Notwithstanding those 1-900 phone calls to the Jamaican Psychic Network, my source is the dependable world of wholesale prices. Take a look at wholesale (and retail numbers) for various products in the last two weeks.
Wed. April 29 Today May 7 Change
Crude futures $49.92 bbl $58.25 bbl +$8.33 bbl
Gasoline futures $1.3977 gal $1.689 gal +29.12cts gal
Heating Oil futures $1.3167 gal $1.515 gal +19.83cts gal.
Spot Gas-Gulf $1.3175 gal $1.660 gal +34.25cts gal
Spot Gas-Calif $1.6000 gal $1.784 gal +18.40cts gal
Spot Gas-Chicago $1.3400 gal $1.650 gal +31.00cts gal
Spot Ethanol-Chi $1.595 gal $1.650 gal + 5.50cts gal
Retail Gas-U.S. $2.0497 gal $2.141 gal + 9.13cts gal
The U.S. Gulf Coast is the largest wholesale market for gasoline in the world, and as of Thursday morning, wholesale costs there were up by 34.25cts gal in two weeks. California has higher prices, but the 14 day advance is behind the pace seen in east of the Rockies’ wholesale markets.
When wholesale prices make a double digit move so quickly, it presages a similar move in retail markets. It wouldn’t surprise me if the next few weeks see fuel prices make their closest approach to the $2.30 gal level that is listed as the likely peak by the Energy Information Administration (EIA). I will still take the “under” if this is listed in a Vegas sports book as an over/under line, but you never know. There’s the myth that analysts, whether in the private sector or the public arena, can predict absolute numbers with certainty – I metaphorically compare it to taking a pulse with oven mitts on (a pristine un-used item in my kitchen, where cooking is regarded as “too messy” according to my wife).
I actually think that gasoline futures (the RBOB contract on NYMEX) --as well as wholesale and retail gasoline prices-- will move higher in the next two or three weeks. But that is a prediction not based on fundamentals, but instead on crowd behavior and the tendency for Spring fireworks to end like Summer fireworks. We’ll know the high is at hand when the hue and cry gets front page and first network story attention. I also believe that the gasoline market is essentially getting all dressed up for Memorial Day, with no place to go in the weeks thereafter.
I believe this is the year of unsustainable rallies - - whether it be in oil, equities, or real estate. We’ll go higher in the next few weeks - - perhaps to $2.20-$2.30 gal - - but there is too much additional refinery and crude production capacity to prevent markets from slipping back into a slog.
Speaking of Fundamentals
Pity the poor business reporters who had to write about fuel prices last month. April 2008 brought swings of 33cts gal; April 2007 saw 30cts gal of volatility; and there was 27cts gal of movement in 2006. You couldn’t really invite readers into an article which proclaimed that Americans were spending $2 more per month (total cost, not per gallon) on gasoline in April versus March. There was no cache, as Mr. Costanza might say.
From a more distant perspective, there were some pretty strong comparisons, however. Americans spent just under $777-million per day on gasoline in April 2009, compared with $1.338-billion in April 2008. I think the monthly expenses for May, June, and July 2009 will be in the $800-million to $850-million neighborhood. Measured versus last year, the savings will be substantial - -perhaps as high as $70-billion over three months - - but there’s still more money going toward fuel than say in Spring/Summer 2004.
Again, to repeat: the move to the $2.10-$2.25 gal neighborhood is not tied to traditional fundamentals like supply and demand. Consider:
Crude oil inventory data was released yesterday by EIA. The report showed stocks just above 375-million barrels. We’ve continued to add to the Strategic Petroleum Reserve (SPR) this year, and inventories in those underground salt domes have now reached 718.7-million bbl. Compared to May 6, 2008, when investment banks major fear was not stress tests but $200 bbl oil, we now have 1.094-billion barrels of crude in U.S. storage. That is 74-million barrels above the same combined figure one year ago.
Gasoline demand, meanwhile, is flat. None of the data sets are conclusive, but most suggest that we are using within 1% - - above or below - - how much gasoline we used a year ago.
Diesel demand is a leading economic indicator, and some earnings’ reports indicate it is down by more than 20% from last year. EIA data puts distillate demand (which includes heating oil and agricultural offtake) around 14% below the similar four week period in 2008.
Total petroleum demand, meanwhile, is currently at its lowest point in the U.S. since May 1999.
Let’s put that gap of time in perspective. That forgettable month ten years ago saw the release of two major motion pictures: Star Wars: The Phantom Menace and Notting Hill. The U.S. population has subsequently swelled by about 34-million persons (I’m guessing the birth rate for Star Wars fans, however, has been quite low) Yet, overall oil demand as currently measured by EIA is at 18.212-million barrels per day, which is the lowest such figure since May 14, 1999.
There are many more cars, many more long distance commutes, and until recently, there has been barely any mention of conservation. Demand is down because unemployment is at post-war highs and many people are driving on a “must go” basis, with a minimum of discretionary use.
The historical template for recovery from such demand destruction is daunting.
Flash back to 1979. Oil prices spiked to then record levels, which on an inflation-adjusted basis, matched some 2008 numbers. Prior to the spike, U.S. consumption of all finished petroleum products measured 18.8-million b/d (remarkably similar to recent numbers). By 1980, thanks to high prices and record interest rates, overall demand was about 17-million b/d, and the decline eventually hit a trough of 15.2-million b/d (annual demand for 1982).
Read demand growth didn’t resume until 1986, eight years after the initial destruction. Not until 1998 did annual demand ultimately top the pre-1979 levels.
Calculated on a weekly basis, the 21st century standard for peak U.S. petroleum demand is just over 22-million b/d, reached twice - - first in the week ending December 16, 2005 (22.156-million b/d) and then again hit on February 16, 2007 (22.037-million b/d). Accordingly, the most recent EIA number can be viewed as a measurement that has already revealed nearly 17% in demand destruction from the peak. (Note: on an annualized basis, the demand purge that began in 1979 eventually hit a 1983 level 19% lower).
But before comparing the ongoing energy and economic malaise with the events of three decades ago, one should observe some strong differences.
For one thing, the petroleum mix during the late 70’s and early 80’s saw much higher use of residual fuel. That heavy cut of the barrel has been replaced by natural gas or electricity, or has gone into feedstock for conversion into desirable light products like gasoline and distillate.
There are substantial differences even when one compares mid-April 2009 petroleum demand with what was recorded at the trough in mid-May 1999. Gasoline demand has steadied at just under 9.1-million b/d recently, as compared with 8.76-million b/d nineteen months ago. Jet fuel demand doesn’t show that much destruction, with ongoing levels at 1.422-million b/d, compared with 1.465-million b/d in May 1999. Distillate demand is currently recorded at 3.735-million b/d, or about 285,000 b/d above May 1999 numbers. Marketers of transportation diesel believe that the current number may slump below ten year levels before the final chapter of the demand decline is written.
Also, petroleum demand was much “lumpier” in 1999 with much greater week-on-week variances. The aforementioned May 14, 1999 low of 17.424-million b/d gave way to an 18.7-million b/d figure in the next week. No such demand paroxysm is likely this Spring.
Demand was lumpier then, but pricing is lumpier now. Look to the next 60 days for some mini-bubbles to boil in the stew of investment, speculation, and actual commerce that represents oil trading these days.