Forgive me for my New Jersey bred cynicism, but today’s jobs’ report-- detailing another 467,000 unemployed Americans-- is the wake-up call that Wall Street pitchmen sorely needed. The news sprayed a metaphorical herbicide on the “green shoots” euphoria that lifted prices for commodities in recent months, and brought reflation back to the U.S. economy.
Since it’s the Fourth of July weekend, I’ll devote most of this space to answering some of the common questions I handled this week as motorists hit the roads for peak summer vacation travel. But first, a couple of quick observation for the July 2009 note for the fuel price box score.
- Retail gasoline prices this holiday weekend will average around $2.60-$2.62 gal. That is down from last year’s excessive $4.10 gal or so. I suppose Americans will spend about $1.04-billion each day, and that accounts for a surge in demand to just under 400-million gal per day on Friday, Saturday and Sunday. I’ll speak more about demand in the Q&A.
- We completed a record streak of 54 days where gasoline prices moved higher each day, albeit at a glacier-like pace during some of the period. The streak ran from April 28 through June 21. The current record high for 2009, the $2.6925 gal price on Father’s Day, isn’t untouchable during the rest of the year, but most areas will more likely visit $2.50 gal than $2.75 gal in the month of July.
- The average motorist can figure on spending about $70 less on fuel this July than last July, based on typical monthly purchases of 50 gallons. If you drive a Hummer, the difference is more than $100, and if you drive a Prius, it’s probably less than $50. If you are among the privileged who have some of the new fuel efficient diesel vehicles, this year’s holiday finds a fuel price of about $2.60 gal compared with last year’s $4.77 gal. Since diesel has more BTU’s and bang for your fuel buck, let’s say you use 40 gallons per month, so the savings is nearly $87.
Halftime 2009 Questions
Q. Crude oil moved above $73 bbl this week and then tumbled to $66.50 bbl. What’s with that?
A. Well, first of all, you should realize that it has little to do with traditional fundamentals. Investment managers and professional traders have favored crude oil as a hedge against inflation or a weak Dollar. But when crude couldn’t break out and approach $75-$80 bbl this week, it was a very bearish signal to people who chart these things. It represented the second time that crude oil moved above $73 bbl in the last month, and the second time that it couldn’t sustain gains. Technicians might call that a “double top”. It’s very bearish in the same manner that two failed prison breaks are damaging to the prospects for another breakout. Expensive oil has been put back in the maximum security ward.
The traditional fundamentals - - supply and demand - - look to be poor in the third quarter. The mini-bubble of the Spring is over, but it will be back when plus signs accompany GDP Numbers.
Q. What about Nigeria and Iran - - -my broker told me that chaos in those two OPEC countries would send oil prices skyward. What happened?
A. Individuals who proselytize oil futures can seize events in Nigeria on any given day to justify their recommendations, and unrest in Iran can be credited during most weeks. Chaos is the norm in the former, and disorder is common in the latter. It’s testimony to the weakness of global demand that neither country’s problems have dented global oversupply.
Q. I heard gasoline futures were hammered recently. What happened and what can we expect in the summer?
A. This year’s winter-to-spring rally was a record-breaker and gasoline futures (the NYMEX RBOB contract) topped out at $2.1124 gal on June 16. Today - -July 2 - - gasoline futures were worth about $1.77 gal. That’s a difference of about 34cts gal in thirteen days, or a peak-to-current trough fall of more than 16 percent. Incredibly, the average loss (after the second quarter peak) in the last 25 years of futures’ trading has been 24 percent. So, if this is merely an average year, gasoline futures could fall to about $1.60 gal or so.
Q. Why haven’t I seen retail prices drop by more?
A. Pump prices never matched the increases when wholesale numbers soared by 150 percent. This is after all, the peak demand season, so there’s no compelling reason to drop prices at the moment. But U.S. retail gasoline is very competitive, and we’ll probably see a more brisk rate of decline as we approach Bastille Day, which is always a big holiday at Fox News.
Q. Are there any hot spots or real weak spots across the country?
A. The greater the increase, the greater the fall, so California is likely to see some sharp drops in early July. Wholesale prices there have backed off by about 40cts gal from the early June highs. I don’t expect California to lose 40cts gal from its $3.03 gal 2009 high, but it could lose 15-20cts gal quite easily. The upper Midwest has already given up as much as 15-25cts gal of the high tide that swept through Great Lakes states in the last 30 days, and more drops are coming there. No markets in the country are currently threatened by tight supply.
Q. I heard that MasterCard this week reported that they recorded gasoline demand at its highest level since December 2007. Should I believe these numbers?
A. I could take the Fifth Amendment on this since I have a MasterCard, and the warlords there might deactivate it when I speak the truth. I regard the data from this entity as worthy of placement in “The Ca Ca Chronicles”. The people who calculate and extrapolate demand at MasterCard are hardly uninterested observers - - you could fund many green energy projects on the additional money MasterCard, Visa, and American Express make when retail gasoline prices move higher. I’m not saying that they goose the numbers, but they have a vested interest in extrapolating to the upside. Demand for gasoline is relatively flat – perhaps 1 percent above or below the same period last year.
Q. How are U.S. oil refiners doing?
A. Right now, it is a very poor environment for refiners. The last couple of months have seen them make a reasonable profit on gasoline, but a barrel of oil yields other products like diesel, heating oil, kerosene, lubes, asphalt, as well as some of the funky additives that you might find if you browse through ointments in your medicine cabinet. Products like diesel and jet fuel are selling at margins that are one-tenth of what was witnessed in 2007-2008. You can’t make gasoline without making its “friends” in other cuts of the barrel. It will be a very difficult quarter.
One other item bears mentioning. A number of U.S. refineries were built, and lavish amounts of capital were expended, on units that make light products like gasoline and diesel from heavy sour crude. A couple of years ago, those heavy sour crudes sold at $15-$20 bbl under the price of sweet crude. The discount nowadays has narrowed to $4-$5 bbl. Imagine if you had to pay full airfare for all of your flights, instead of supersavers that were drastically discounted. This is the problem that many refiners have.
Q. Of Columbus’ ships, what was your favorite?
A. I liked the Santa Maria. The Nina and the Pinta were overrated. (Yes, this question is here just to make sure you are still paying attention).
Q. How about heating oil? What are the prospects for heating oil next Winter?
A. It’s always wise to think about heating oil when the northern hemisphere has heated up to its maximum temperature. Heating oil prices are very cheap if you can buy some now, but they get progressively more expensive as you go forward in time.
There is an untold story and possible problem here. Almost all of the storage tanks available to store heating oil in the U.S. are now filled and it is early July. We haven’t seen this much inventory in a generation and degree days are many months away.
Heating oil is not like wine, and refiners and marketers can’t be like that 1970’s commercial icon - - Aldo Cello - - who would sell no wine before its time. After six months or so, the product starts to degrade and create what chemical engineers might call a “witches brew”. This bears watching as we move through the summer.
But right now, consumers who use heating oil for warmth in the winter can probably lock in prices of about $2.75-$3.00 gal for next season. Not bad.
Q. Your tone sounds bearish, but you haven’t dismissed the notion of higher prices or another rally later this year. Why not?
A. Never underestimate the potential for human folly. One can simply walk along the Appalachian Trail and come to that conclusion. Or, you could read international news reports that document instances where parents are holding “Swine Flu Parties” so that their children are exposed to a less lethal version of the current influenza strain.
This kind of logic suggests that Foot Fungus Festivals might be in order, but it also speaks to the capability of the money mob to behave in more fanciful collective manias, or bubbles, if you will.
Several of the major investment banks - - Goldman Sachs & Barclays come to mind - - have raised their target prices for crude by year’s end. Individual iconic investors like George Soros, Warren Buffet, and James Rogers have all hinted that they believe the worst of the economic crisis is behind us.
They have their followers and the herd that was thinned in 2008 has many new offspring. The biggest fundamental in all of these markets is money flow, and it’s not all that difficult to inspire a cascade into assets of all types and sizes.