A circus atmosphere prevailed in oil markets through 2007, 2008, and most of 2009, but the just completed winter and the first week of spring 2010 have exhibited the collective excitement of a MerchantIvory movie. (True factoid: One of the action packed sequences in Remains of the Day occurs when Anthony Hopkins irons his shirt!).

   But you don’t need a circus to have a high wire act. I still believe that we’ll see U.S. oil and fuel prices hit eighteen month highs in the coming weeks. That might mean $3.00 gal or higher for retail gasoline and retail diesel and something in the mid-$80’s for crude oil. You do not need a circus, to have a high wire act.

   April and May are historically the two months that are most hospitable to gasoline price spikes. More than half of the peaks in gasoline futures occur in those months, although last year was a bit of an outlier with June yielding the apex.

   Today’s scorecard finds the nationwide regular gasoline price at $2.811 gal, which suggests a daily cost of approximately $1.07-billion. The price on the same day last year was $2.009 gal (it is now officially more than a year since nationwide prices averaged less than $2.00 gal). Plugging in the same demand numbers yields a daily cost of about $777-million last year, so Americans are paying about $293-million more for their motor fuel than a year ago.

    The price points come from over 110,000 fueling sites that are part of the OPIS retail database. Those prices are gathered electronically, and in many cases via “real time” each and every day of the week (which begs the question of why does the Department of Energy still insist on doing costly phone surveys for its weekly retail gasoline and diesel prices. But that’s an issue for another day.)

Dueling Demand Sets

    More relevant is the controversy about current and recorded gasoline demand. The statistics aren’t clear cut. The Federal Highway Administration (FHWA) last week reported that January vehicle miles traveled (VMT) dropped in January. The data is delayed, but it confirms anecdotal reports of very weak winter demand, even before the snowstorms of February.

   The most recent data from MasterCard suggests that a turn of sorts has occurred in gasoline consumption in the last four weeks. The credit card company’s SpendingPulse report implies that gasoline consumption is up about 1.5% on a year-to-date basis versus 2009, and suggests last week saw a 2.5% demand boost versus the same week a year ago.

  Then there’s the Department of Energy data. It suggests that the last four weeks have seen gasoline demand some 1.2% above the same period in 2009.

   To some extent, all of these reports are less than rosy for gasoline retailers, although it is not clear how much demand has transitioned from traditional service stations to high volume Big Box clubs or New Era retailers that emphasize food service and cheap fuel. For American companies that hope to make money on retail fuel sales, the first quarter of 2010 is one of the worst such periods in the last five years.

Chang (oil) and Ang (equities)

   Oil and equities continue to be conjoined at the hip. If you are rooting for lower oil prices, be careful what you wish for.  It may take a vicious dive in the S&P or the Dow Jones Industrial Average to generate the sort of downdrafts necessary to take crude oil back below $70 bbl or retail gasoline beneath $2.50 gal.

   I’m skeptical as to whether this relationship will continue long term. And a couple of historical footnotes underscore how irrelevant stock market performance was to oil price movement for most of the last fifteen years.

   This month, the Dow is flirting with the 11,000 number. The first time that index crossed 11,000 was May 3, 1999. The price of crude on that day was $18.85 bbl and the average retail price of gasoline was $1.156 gal.

   The last time the Dow closed above 11,000 was on September 26, 2008, just before markets slipped to the brink of the apocalypse. On that day, crude oil futures closed at $106.89 bbl and retail gasoline fetched an average $3.683 gal at the pump.

Alcohol Makes For a Cheap Date

   One of the victims of the 2007-2008 Writers Guild of America strike was the CBS drama Cane. That show chronicled the power struggles of a Cuban-American family sugar business in South Florida.  I never watched the actual show, preferring instead to watch reruns of Matlock consistent with most people my age. My own suspicion is that the cancellation had less to do with writers’ labor action, and was attributable to a clandestine plot by the makers of Splenda or Equal.

   But I did catch a commercial or two for Cane. One of them still resonates. Actress Gail O’Grady dramatically pleads with the actor Jimmy Smits, and tells the workaholic Cuban-American sugar czar:  “I don’t want to talk about ethanol. I want to talk about us!”

   In contrast, I’d like to talk a bit about ethanol this spring.  We can toss out the old saw that holds forth: all commodities tend to move as one. More recently, we have seen crude oil prices within $1 bbl or so of eighteen month highs, and the lowest natural gas prices in seven or eight months. The market has also determined that ethanol is worth some 50-80cts gal less than various gasoline blendstocks.  Futures prices imply that this relationship will continue, and ethanol will trade at a huge discount to traditional fossil fuels. When you factor in the tax break that ethanol receives - - 4.5cts gal on a typical gallon of unleaded regular gas with 10% ethanol - - adding ethanol to the mixture results in a net price some 9-12cts gal below the initial price of the gasoline.

   In the space of a blog, I have to oversimplify ethanol economics, and one can render a litany of protests related to subsidies, performance, corporate-sponsored science, etc.  I am neither condemning nor endorsing the finished product. My observation is simply that corn, natural gas, and ethanol are all approaching multi-month lows while crude and gasoline hit multi-month highs. That divergence has consequences.

   This will become even more interesting later this year. Our sources at Oil Express and OPIS (visit the homepage at www.opisnet.com) tell us that the Environmental Protection Agency will almost certainly allow 15% ethanol blends later this year. A ruling is expected this summer. If you’d like to get an overview of the many issues, visit the OPIS web site and request a trial copy of Oil Express.

Odds & Ends

-         - Whether one calls non-commercial participants in oil futures and options markets “speculators” or “investors”, one can’t argue with a recent statistic. This segment of the futures business has never had a larger “net long” position in RBOB futures than was recorded last week. (New data will be issued this afternoon.)

-         Biodiesel is coming to Pennsylvania next month. Some 2% of the composition of on-road diesel has to be made from a biofuel, whether it comes from soy, other grains, or French fry drippings, bacon fat, etc.  If northern Pennsylvania residents see black bears forsake the camp dumpsites for truck stops, you’ll know why.

-         One of the most memorable quotes I recall from my education in English literature is the Alexander Pope line: “Vice is a monster of such frightful mien, that to be hated needs to be seen; but seen too oft; familiar with its face, we first endure, then pity, then embrace.”   While the poetry refers to the way that vice can insidiously infiltrate our lives, I believe that we can substitute the word “Advice” and draw similar conclusions. Several more investment banks this month issued research reports that include “advice” on the almost certain climb higher for oil prices. These are some of the same prophets who advocated buy and hold strategies for most assets in 2007 and 2008.

-         I may have spoken too soon when I ridiculed the likely production values and cultural gravitas of Hot Tub Time Machine earlier this month. The movie opened to fairly solid reviews today, and I’m tempted to see it at the local metroplex. I am working on my own hot tub time machine – I have the hot tub, the water jets, the footings, and the proper patio setting. I just need to figure out that space/time continuum thing and I’ll be in business.