Expect a new round of “highest since” references when reporters cover the U.S. oil business between now and next week.
The greatest fundamental in 21st century markets was on display at the end of 2009 and on this first full business day of 2010. That fundamental is money flow - - large amounts of investment money tend to pour into mostly long positions in crude oil and refined products futures or options in the first few January sessions of a new year. This year has more medium and short term economic enthusiasm than last (not exactly a high limbo stick) so the sugar rush that the new money provides may be more energetic than usual.
The gains seen in futures’ markets for the last few low volume sessions of 2009 and the first moderate volume business day of 2010 do bring back numbers not seen since the wildest year of the just completed decade - - 2008 - - when crude oil traded for less than $33 bbl and more than $147 bbl within a span of less than five months. Examples:
- Today’s $81.51 bbl close for WTI crude oil futures represents the highest settlement price on the NYMEX since October 9, 2008. If you want to nitpick, you can cite the brief intraday period where WTI hit $82 bbl on October 21, 2009. But in terms of the recorded price at settlement, the January 4, 2010 crude price is the highest value in more than 450 days.
- Heating oil futures closed at $2.1905 gal today, surging far beyond any price level witnessed in all of 2009. One has to go back to October 20, 2008 when heating oil settled at $2.2099 gal to find a higher level.
- Gasoline futures (RBOB) settled today at $2.1044 gal. There was some intraday trading last June just above $2.11 gal but today’s closing number is the highest end-of-day level since October 3, 2008 when the RBOB contract settled at $2.2283 gal. (Editor’s note: prices a day later fell below $2.06 gal, reminding us that markets can go up or down 15cts gal with similar ferocity.)
Retail prices have yet to catch up to the trail first blazed by futures prices, but wholesale numbers have advanced in step. For example, in less than three weeks time, the average wholesale gasoline price has spiked some 23cts gal to 26cts gal higher in each region of the country.
Accordingly, I can predict with reasonable certainty that retail prices will soon eclipse the highs of 2009. My sense is that this 2010 paroxysm will take the average street price above $2.70 gal by the weekend, and it may indeed flirt with $2.75 gal before it gives way to some revaluation in wholesale prices and futures. But from that more temperate level, it will be easy for street prices to eclipse $3.00 gal with even a modest winter-to-spring rally. How much time we spend above $3.00 gal is an issue for another day.
A Billion Dollar Bill Comes Back Home
As of Monday, January 4, the U.S. price for regular gasoline was $2.663 gal (see latest prices each day at www.fuelgaugereport.com)
The last time that we calculated an average price above $2.70 gal was October 25, 2008.
Some back of the envelope arithmetic puts the current U.S. fuel bill at about $1.066-billion each day. A year ago, that daily outlay was about $625-million.
Gasoline will garner the headlines, but the ongoing rally has been mostly based on the price of crude. The average price for crude in all of 2009 was $62.09 bbl, so for all intents and purposes, we have a $20 bbl head start on 2009 in the New Year.
So, you are soon likely to see prices for home heating oil and retail diesel that are higher than what was recorded in all of 2009. That translates into New Englanders getting deliveries of heating oil that carry a price of about $3.00 gal this month. Truckers and diesel car enthusiasts who fuel up in western and northern states could pay something above that less-than-magical $3 gal level as well.
Today’s price of $2.83 gal for U.S. diesel represents the highest price for diesel since a brief rally last November. If retail prices soon rise to say $2.90 gal (and I think they will this week), that will represent the highest level since October 21, 2008.
Extreme Decade Revisited
Regular readers will note that I never deliver prognostications about what might be the “average” price level for any given year, or for that matter, any given season. The summary of the decade completed last Thursday and listed below can be taken as mute testimony to why such average predictions are folly.
A Decade of Oil Price Measurement
Crude Oil Avg Retail Unleaded Avg. Retail Diesel Avg.
----------------- --------------------------- ------------------------
2000 $30.15 bbl $1.51 gal $1.55 gal
2001 $26.14 bbl $1.44 gal $1.49 gal
2002 $26.15 bbl $1.35 gal $1.37 gal
2003 $30.99 bbl $1.56 gal $1.58 gal
2004 $41.47 bbl $1.84 gal $1.86 gal
2005 $56.70 bbl $2.27 gal $2.48 gal
2006 $66.25 bbl $2.57 gal $2.79 gal
2007 $72.41 bbl $2.79 gal $2.96 gal
2008 $99.75 bbl $3.25 gal $3.91 gal
2009 $62.09 bbl $2.35 gal $2.52 gal
Decade $51.21 bbl $2.09 gal $2.25 gal
We ended the decade of the ‘90’s (or began the year 2000 if you prefer) at a crude oil price level of $25.75 bbl. We finished the decade at $79.36 bbl.
The average numbers within that ten year space aren’t particularly inspiring or unnerving -- we crossed $40 bbl two decades ago but didn’t tally an annual average above that level until 2004.
You might then look at the table above and erroneously conclude that 2009 was pedestrian. It featured a $62.09 bbl annual average, not particularly shocking when compared to other annual averages in the last five years. But in glossing over averages, you might not recognize that nearly one hundred twenty eight dollars in U.S. currency separated the 2008 intraday low and high. (Note: to give some long term perspective, some of the annual performances in the 1990’s saw annual low/high variation in crude futures of less than $6 bbl.
The decade of the Nineties saw a low crude oil settlement of $10.72 bbl on December 10, 1998 and the high tide mark occurred when $40.42 bbl was the settlement price for WTI on October 1990. Only $29.50 bbl separated the decade lows and highs.
Numerologists might note that if one averages the 2000’s low crude close ($17.45 bbl in 2001) with the high settlement ($145.29 bbl in July 2008), it yields a price of $81.37 bbl, which is only 14cts bbl below today’s settlement price. This is the kind of numerology that inspires cults, however.
The low point for U.S. pump prices for unleaded regular in the decade of the “Noughties” was $1.077 gal on December 18, 2001. The high point came on July 17, 2008 when consumers paid an average $4.11 gal.
An even greater span separated the decade’s tides for diesel. During Christmas week 2001, the average retail diesel price was $1.21 gal. The same fuel, albeit with significantly less sulfur, cost $4.85 gal in July 2008.
* * *
Will this decade be just as volatile? Traders, investors, and unattached observers might think not, based on the recent history that has kept crude oil in a $15 bbl trading range since August. But a safer bet is that 2010 will bring another wide range for crude and refined products’ prices thanks to uncertainty about the U.S. dollar, the frailty of the global recovery, the movement toward alternative fuels, and most importantly, the ever expanding amount of leveraged money in futures and options markets.