The 2009 version of the winter/spring gasoline rally has actually surpassed anything that has been recorded in the previous 25 seasonal price spikes. I’m sick and tired of journalists referring to emphatic events or circumstances with a “mother of all (insert noun here)” introduction. Hence, I choose to call this a crazy uncle year. For anyone that is part of the politically correct storm trooping brigades, my metaphor is not intended to cast aspersions on uncles, or people who have genuine medical afflictions.
More about crazy uncles in a moment. First, let me present a scorecard on just how crazy this 2009 oil price rally has been when viewed from multiple perspectives.
Retail gasoline prices surpassed $2.39 gal this morning. The average nationwide number may flirt with $2.40 gal or so this weekend. Prices have moved further and faster than I thought possible five months ago, or five days ago. As I learned in 2007 and 2008, oil markets often have more false tops than a Burt Reynolds’ impersonators’ convention.
The increases probably mean that American’s will spend about $925-million or more each day on gasoline through the rest of May. That still compares favorably with last year, when the figure was closer to $1.5-billion per day. Viewed from an altitude of four years, the expenses this weekend will be about $100-million above Memorial Day 2005 levels. We used substantially more gasoline then than we need now, thanks to ethanol displacing traditional hydrocarbons, but also reflecting the ongoing recession. The unemployed use modest amounts of fuel.
Cycles and Seasonal Tendencies
I live in a house full of females - one canine and three human. I have learned that women in my house occasionally suspend all normal rules of behavior, much like the Amish rumspringa. Through experience, I have learned that cycles of behavior need to be studied and accepted, if not entirely understood.
The strongest cycle in oil markets is the seasonal template that sees gasoline traditionally reach a bottom from November 1 through January, only to stage a remarkable rally that typically peaks in the second quarter.
This year’s version of that cycle actually brings the most extreme behavior ever, or at least since unleaded gasoline has been around. That’s where the crazy uncle metaphor fits.
Personal note: All of my uncles were members of the greatest generation ever, and most toiled through working class manufacturing jobs, but were remarkably still able to send their kids to college, even though they had to find work or enlist in the service before they reached the age of 19. But there was always that one uncle whose rhetoric and behavior defied reason, yet he dominated every conversation, and would not listen to meek or spirited challenges to his wacky positions on everything from the moon landing to race relations.
This year’s rise has that crazy uncle feel. If you want to make some money on a bet, simply wager with the casual observer that this year’s gasoline rally exceeds anything in the last 25 years.
Backing It Up With Statistics
Three statistical measurements hopefully underscore my point.
Gasoline futures-- which trade in what I would call the 21st century electronic version of a huge dysfunctional family-- hit a December 24, 2008 low of 78.75cts gal.
On Wednesday of this week, gasoline futures hit $1.8724 gal, an increase of just under 138%. Last year saw an outright price increase of $1.45 gal, but that was a bounce of “only” 61.2%. Previous to this manic cycle, the previous percentage record cycle rally was in 1988-1989 when futures moved up 103%.
U.S. pump prices for unleaded regular ended 2008 a fraction above $1.61 gal. This weekend, they very well could hit $2.41 gal. Street prices would then have rallied by a tidy 50% in less than five months. Last year’s retail uptick over the same time frame was just 25%, and the greatest 21st century surge to date was the 37% increase in 2007.
The average wholesale price in the U.S. for conventional gasoline was just below 93cts gal on Boxing Day 2008. The presstime average was about $1.90 gal.
It’s easier for record price increases to follow record drops of course. Crude fell by more than $110 bbl from peak to trough in 2008. But history suggests that all rallies end, and all pendulums swing to the left as well as to the right. The most recent 25 years of history shows that wholesale gasoline prices peak in April or May nearly 70% of the time. The 2008 peak at wholesale was in mid-June and retail hit its apex in early July, but I regard last year as an outlier or rogue. The bigger the rise, the bigger the fall, is also a worthwhile axiom one should remember.
Expectations Games
A couple of expectations games have cast huge shadows on oil price moves of late.
A good friend of mine, Walter Zimmerman, with United Energy, is generally regarded as the foremost technical analyst in the energy segment. He uses sophisticated charts to essentially assess upside and downside potential based on the buying and selling behavior of the teeming masses that make up futures and options markets.
A quote in a piece of analysis he sent to clients this week is both eloquent and elegant in its simplicity.
“Drivers may think they are paying up for gasoline when they fill their tanks,” he notes, “but charts show that they are actually ‘paying for economic expectations’.”
Crude oil futures really do represent a proxy vote on economic outcomes some 3-12 months from now. It is that optimism that fueled the rise in crude from about $33 bbl to $62 bbl recently.
The fundamentals of supply and demand haven’t changed all that much - - some of the investment houses I trust believe that currently unwieldy global crude stocks will fall modestly in the second half of the year. World stocks currently reflect about 61 days of supply, and that number is as bloated as the 1977 Elvis in a jumpsuit.
Expectations for the “driving season” have been low, as they should be given the high rate of unemployment and the destruction of wealth that’s occurred via housing deflation and deterioration in financial assets. A couple of months ago the expectations for driving were similar to the expectations for a Paris Hilton on Jeopardy! (I’ll take Hotel Heiresses for $200, Alex)
I think we’ll actually see a small year-on-year rebound in the driving season this year. But the Energy Information Administration brackets the driving season as April through September, and most media calculate it as the Friday of Memorial Day weekend through Labor Day. This is akin to ESPN treating the football season as January through December, or CNN beginning the 2012 presidential election cycle on January 21, 2009.
This driving season will be about 81 days long, running from Friday, June 19 through Monday, September 7. I expect demand to average somewhere between 380-million gallons per day to perhaps just under 400-million gallons per day. There is plenty of U.S. refining capacity, as well as offshore refiner willingness to make enough fuel.
That demand forecast is based on my personal belief that driving season prices will range between $2.00-$2.75 gal in most parts of the country.
If this year sees $3.00 gal gasoline, I will cry uncle.