I made a grievous error in my last post, but it helped inspire a metaphor that aptly summarizes mid-July world oil markets.
No, the error was not in my bearish forecast for July prices. You will almost assuredly see pump prices for gasoline and diesel accelerate their dive in the next few days and weeks. In fact, if you live in South Carolina, you might even be able to fuel your car and pay something close to $2 gal as you search for the Appalachian Trail and a midsummer respite from stress.
Before I correct the error, here’s a July 10 scorecard on oil, gas, and diesel prices:
July 10, 2009 Fuel Price Scorecard
Current Price Father’s Day 2009 Last Year
---------------- ---------------------- ------------
Crude $59.25 $69.55 bbl $145.08 bbl
Retail Gas $2.565 gal $2.693 gal $4.104 gal
Retail Diesel $2.596 gal $2.633 gal $4.814 gal
A scorecard note: Very quietly, the daily bill for U.S. gasoline has dropped back below $1-billion, after reaching $1.04-billion on Father’s Day. Current expenses can be calculated at about $990-million, and we’ll drop below $950-million per diem this month. This is the anniversary period of record gasoline prices in 2008, when Americans spent as much as $1.6-billion each day on gasoline.
More on these trends a bit later. First, let me correct the error in the July 2 post.
Orson Welles and Oil
The aforementioned error came in my reference to wine and the iconish 1970’s figure Aldo Cella. First of all, I misspelled his name -- -it is Cella and not Cello -- -and secondly, I confused his commercial spots (for Cella Lambrusca wine) with the Paul Masson brand. In those Paul Masson ads, Orson Welles would always reiterate the winery’s slogan of “We will sell no wine before its time.”
The Aldo Cella ads noted that “Aldo Cella is not a slave to fashion, but Aldo Cella knows what women like” as the white suited Italian lavished red wine on his mostly female guests. I wish I had his magical insight into the opposite sex - - in a house full of women, I might discern the riddle of women’s shoes.
What does Orson Welles have to do with oil? If I rely on 2009 for this stretched metaphor, I might suggest that both peaked quite early. But more accurately, elegance, peak performance, and appearance early in Mr. Welles’ career gave way to a sloppy midsection and a full from grace later on. That is essentially what has happened to global oil products half way through 2009.
Most money managers cast their tunnel vision on crude oil futures and retail gasoline prices. But the true measure of economic activity shows up in the “middle” of the finished petroleum barrel. Data released by the Energy Information Administration this week shows a petroleum midsection that is downright slovenly. Gasoline demand is unspectacular, but it is off of its winter keister.
The products that are manufactured from the middle of the petroleum barrel - -heating oil, diesel fuel, jet fuel, lubricants, etc. - - conjure up epic comparisons. We haven’t had this much distillate (diesel & heating oil) in U.S. storage since January 1985 when the original recording of We Are the World was recorded by USA for Africa. Mike Tyson had yet to make his professional boxing debut. General Motors launched its new automobile line - - the Saturn - - promising that it would be “a different kind of car company.”
Demand for these products is down by about 10 percent from last year, and last year was no barn burner.
This hefty midsection has some consequences for the rest of summer. U.S. and offshore refineries can’t keep running at relatively high rates. Gasoline is welcome, and U.S. consumption has found a Summer comfort zone around 385-million to 390-million gallons per day, but gasoline comes with unwelcome in-laws. There is simply no room to accommodate additional diesel, jet fuel, heating oil and other products. So, I believe you’ll see U.S. and European refiners cut utilization, even though it’s midsummer. It’s not a matter of collusion or manipulation - - -it’s a survival reflex.
If U.S. and foreign refiners cut output, it means less demand for global and domestic crude. Despite the bullish predictions and perhaps a bullish predilection among investment banks like Goldman Sachs and Barclays, I find it difficult to make a case for a huge crude rebound later in 2009 because of these prospects for lower runs.
Some Easy Predictions
The U.S. nationwide average for gasoline is almost certainly on a collision course for $2.25-$2.50 gal numbers. Wholesale prices have dropped by 45-60cts gal in the last thirty days, and the retail decreases will become more aggressive in the rest of July. Look for the biggest drops to occur on the West Coast, where fears of financial stability have crimped demand, and throughout the Midwest.
Diesel prices may be under more pressure than gasoline values. It will not be uncommon to see prices in the $2.35-$2.50 gal range, which would be about half the level witnessed in July 2008.
The record streak for gasoline prices moving higher - - 54 days in a row ending June 21 - - won’t be approached again this year. Right now, we are on a nineteen day streak that has seen each day deliver lower prices. That streak will stretch to perhaps 30 days before choppier congestive action develops in U.S. markets.
These are easy predictions. Forecasting prices some six or twelve months from now is witchcraft. It’s akin to predicting fashion - - for all we know, men will be wearing Capri pants and Jheri curls next Spring (I will not).
More “Chronicles of Ca Ca” or an update on the Crips & the Bloods
The “Ca Ca Chronicles” were in full regalia earlier this week when the Commodities Futures Trading Commission Chairman Gary Gensler announced that the regulatory body would hold hearings this month and consider new measures to curb speculation in energy markets.
The violent response was akin to what might happen if federal agents ordered the Crips and the Bloods to exchange their blue and red colors for beige. We have not seen many moderate voices and objectivity is on summer holiday.
On one side, executives for futures’ exchanges, investment bankers, and professional paper traders all cried foul and warned that onerous regulations or disclosure could kill liquidity. Thinner markets will be more susceptible to violent upswings, these futurists immediately opined.
On the other hand, airlines, end-users, and even the OPEC cartel (via its just released outlook on oil) welcomed movement toward better regulation and the benefits that new rules might have on consumers. Most petroleum marketers sided with the end-users, claiming that the incredible expansion in futures’ participation has made prices more volatile, and loftier than they might be without the Wall Street influence.
Even heads of state weighed in. British Prime Minister Gordon Brown and French President Nicolas Sarkozy both said that volatile oil prices have caused grave damage to the world economy. As far as I know, there is no truth to the rumor that Mr. Sarkozy said “Woody, I steal your volatility” (an oblique reference to my favorite episode of Cheers).
Somewhere in Bartlett’s Familiar Quotation, there must be a sage who has said “let’s cut the crap” in the King’s English.
The questions that the CFTC will ask, and the requirements that they consider are worthy for 21st century scrutiny. Forgive me for not recollecting the name, but an Existential scholar once noted that “absolute freedom is absolute hell.” To a great extent, this can apply to absolute free markets.
There is a new CFTC sheriff in town. The commission should look into better disclosure of the entities that participate in all futures and derivatives’ markets. It also should consider whether antiquated position limit thresholds need to be updated. The public, and to some extent the petroleum business, wonders whether a huge foreign production concern could hypothetically move huge sums of money in unfettered fashion into a commodity, with dire consequences for the users of said commodity. (For the record, I do not believe that this has happened)
I’ve compared the futures & options markets before to a large superhighway. The bankers and professional traders and employees of fee-based exchanges would like this toll road to have no speed limits, no traffic lights, guard rails, and few state troopers. . Some of the end-users would like to shut the highway down. A compromise makes sense.
Yesterday, we traded about 600,000 crude oil contracts on the NYMEX, each representing 1,000 barrels of WTI crude. I watched in the last ten minutes of trading as about 1-million bbl of crude traded every minute. The world uses about 59,000 bbl of crude per minute, so I think there’s enough liquidity, if not a case of the vapors.
But the speculators get spanked as regularly as the Crosby children many decades ago or Marv Albert in the 90's. Oil prices have moved down by some $15 bbl in the last three weeks despite a bias among speculative/investment funds that is daunting. Last week’s Commodities Futures Trading Commission report (which tracks the purchases and sales of non-oil interests) showed a huge 101-million bbl bias. Translations: money being bet or invested on a specific oil outcome was tilted very much toward the bullish side.
Ultimately the polemic between the speculative pro-liquidity crowd and the suspend-trading-in-core-commodities crowd is not as clear cut as the battle between good and evil that is playing in your local metroplex this summer.
Stay tuned. The hearings on his matter in Washington this summer will make for interesting theater.