The last six days for global oil markets represent the conundrum of petroleum price analysis in microcosm. The initial reaction to the news of the coordinated International Energy Agency (IEA) and U.S. Strategic Petroleum Reserve sales was “Sell! Sell! Sell!” That quickly shifted to “Buy! Buy! Buy!” with no sea change in fundamentals.
More on “strategic sales” and bipolar market swings in a moment. But first, here’s the scorecard as we drive into Independence Day weekend:
The national average price for gasoline begins the weekend at $3.55 gal. Here’s how that price compares with similar averages calculated by OPIS in the last ten years.
July 1, 2011 $3.550 gal
July 1, 2010 $2.754 gal
July 1, 2009 $2.630 gal
July 1, 2008 $4.087 gal
July 1, 2007 $2.961 gal
July 1, 2006 $2.908 gal
July 1, 2005 $2.265 gal
July 1, 2004 $1.907 gal
July 1, 2003 $1.485 gal
July 1, 2002 $1.389 gal
I suppose you can make these statistics dance to whatever agenda, or prophecy, or observation you might desire. I would love to see a similar ten year representation for cable bills, telecom charges, common prescription drug fees, and especially, college tuition costs per credit hour. (I still am paying off the NYU bill) Draw your own conclusions. Here’s my borrowed observation from a Scottish poet.
“He uses statistics as a drunken man uses lamp-posts . . . for support rather than illumination.”
- Andrew Lang
A Quarterly and First Half Year Comparison
Here’s an interesting dollars and cents calculation that I performed on the back of a pristine No. 10 envelope:
The second quarter of 2011 almost took the prize as the all-time high water slot for quarterly U.S. motor fuel expenses. Regular gasoline from April 1 through June 30, 2011 averaged $3.7398 gal, bested only by the second quarter 2008 when gas fetched an average $3.75 gal. If only we knew then, what we know now, and vice versa.
One can quibble about precision, but most data sets point to U.S. gasoline demand of about 9.06-million b/d in the quarter, a number virtually identical to the same period in 2010. That means that motorists spent about $122.3-billion on gasoline this spring quarter, compared with just over $96-billion for the same stretch in 2010. I also calculated the bill for the first six months of 2011, and the tally was $243.26-billion versus $193.8-billion in 2010.
It was a particularly noisy quarter. The “benchmark” WTI blend of crude averaged nearly $102.50 bbl for the period, higher than all but the spring/summer quarters of 2008. But Brent and other sweet crudes approached or even exceeded previous records, and the great disconnect between “at sea” and landlocked crude will continue through summer. If I can use an equine (horsey) metaphor, the WTI benchmark has become the “Mr. Ed” of crude oil blends, and Brent has become the Secretariat.
BIPOLAR BEGINNING
The teaser that opened this blog entry mentioned the bipolar nature of oil prices. Usually, the mood swings between euphoric and melancholy are seasonal. Buyers are as manic as Robin Williams in March and April, but mimic Richard Lewis in the period between the autumnal equinox and mid-November.
Last week, we saw a narrowly spaced bipolar reaction, first on news of the surprise release of reserves from strategic oil reserves, and then thanks to the macroeconomic read that Greece would not be slipping into the Mediterranean while financial money managers spend July and August in the Hamptons, Martha’s Vineyard, Newport, or the South of France.
Neither reaction was rooted in deep thought or analysis. Even investment houses that have trumpeted the case for higher oil prices in late 2011 and through 2012 were surprised by the manic mini-spike that delivered 25cts gal of gasoline upside between the last weekend of June and the first day of July.
Continued bipolar volatility might be observed next week, since the “business days” right after Independence Day yield only to December 24-31 sessions in terms of little real business getting conducted. As far as U.S. markets are concerned, we’ll see a bit of the silly season. Physical trading quiets to a murmur, and the dynamic of “paper” asset trading sees performance horizons measured in moments, rather than months.
THE SPR AND IEA GAMBLE: AN UNCERTAINTY PRINCIPLE
Since the middle of 2009, uncertainty in petroleum supply has manifested itself mostly via an upward bias for crude. Uncertainty is often the high octane fuel that drives investment (or speculation) in mostly long (buying) positions in crude oil futures and options.
The surprising news of a coordinated release of crude oil barrels, announced by the International Energy Agency on Thursday, at the very least erects an “amber traffic light” for petroleum markets. There will be much written about how negligible the volumes of oil released from reserves in the U.S., Europe and Asia might be. In round terms, the outright auction of physical crude represents less than 2% or so of the world’s crude requirement in July or August. .
From my vantage point, the sale looks to be a message, delivered to two principal recipients.
Efforts to curb financial investment or participation in oil markets died in Congress this spring. Meanwhile, various think tanks – whether motivated by capitalism or altruism - - have gravitated toward a consensus view. The view holds that economic prosperity will create demand quicker than producers can bring on new supply. Many money managers are anticipating a huge bull run for oil this winter.
The IEA crude oil release, of which half of the barrels will be sourced from the U.S. Gulf Coast Strategic Petroleum Reserve, may be a measured gamble. The gamble revolves around whether this “extraordinary” action will be remembered when paper and wet market traders chase oil in the fourth quarter of 2011 and the first quarter of 2012. Western economies survived $120 bbl oil through various intervals in the first half of 2011. It is debatable whether those developed economies can survive $120-$140 bbl some 6-12 months down the road. The IEA action in June represents a flashing amber light that might provoke some caution when the seasonal bull run commences next winter. Perhaps, it may lead to fewer bandwagon purchases when financial participants (or their programmed computers) seek to ride momentum higher next March or April. In theory, there might be fewer purchases if companies or individuals recall the uncertainty of government action.
The second target for the message may be hawkish OPEC countries. Within the metaphor of “bureaucratic time”, the IEA action came in a nanosecond after the June OPEC meeting. The agency was clearly disappointed that the cartel did not agree on across-the-board production increases.
We’ll soon find out whether IEA’s action will result in a kinder, gentler cartel—an oxymoron if there ever was one. Or, alternatively, will lower prices and lower revenue provoke hawkish countries like Iran, Algeria, and Venezuela to cut production and preserve numbers that might be needed to balance budgets?
The gamble? Regimes in Iran and Venezuela hardly represent rational recipients of any message, whether it’s delivered by the IEA, the U.S., FTD or UPS. And while oil and commodity traders may be brilliant as individuals; in the aggregate, the trading community tends to be amoral and sociopathic. There may not be a rational receiver that hears the sound of a warning or detects the amber light.
Was this orchestrated in Paris by the IEA, or in Washington by the Obama Administration? We will probably never know. If the genesis came from the Department of Energy, the administration may have bitten off more than they can Chu.
(Apologies, I just couldn’t resist. The reader now knows why I didn’t blog when the Weiner story was trending)
SUMMER OUTLOOK AND RANDOM OBSERVATIONS
- - The May/June swoon in gasoline prices has stalled for the moment. That leads me to believe that we’ll see gas prices in July and August range between $3.25-$3.75 gal in most markets. We saw a few Midwestern markets briefly slump below $3.00 gal (Hee Haw salute goes to Toledo) but those were sideshow numbers that won’t be part of the typical summer carnival. The Midwest has presented the greatest price rollercoaster in 2011, so Great Lakes’ folks might be particularly bipolar these days.
- - The investment banks will soon trumpet the compelling case for $120+ bbl oil in 2012 as well as $4 gal gasoline. They may be right about spring 2012. But the large merchant banks do have a vested interest in inflation. Using the trumpet metaphor, JP Morgan has been Dizzy Gillespie and Barclays has been Miles Davis. Goldman Sachs has actually moved into the back row, with a more temperate viewpoint.
- - At the end of summer, if there are no hurricane probability cones warning of imminent landfall between Corpus Christi, Texas and Pascagoula, Mississippi, we will see lower gas prices. If the Weather Channel’s Jim Cantore does live reports from Texas and Louisiana, view him as the Grim Reaper for reasonably priced summer gas.
Gas prices may be skewed toward relatively high levels in July and August because much of the world has trouble making fuel that meets tough U.S. specifications. Those specs ease on September 15, and foreign contributions could push prices lower until the really loud investment bank brass section sounds its fanfare. The most likely time frame for cheap gas is September 15 through Election Day, but it’s not tied to political manipulation.
- - The fuel that merits special consideration from consumers, and most commercial concerns in the next six to nine months is diesel. U.S. consumption is not spectacular, but diesel is the fuel that developing countries demand as they grow. Whether it’s for transportation, power generation, or for general industrial use, the middle of the barrel - -the diesel cut - - has the highest upside through 2011 and into 2012.
Note: I’ll be speaking about the outlook for diesel fuel prices at the 17th Annual OPIS Fleet Fueling conference & exhibition at The Palazzo Hotel in Las Vegas in September. For details of the meeting, visit the website at http://www.opisnet.com/fleetfueling/
I’ll also be speaking in Clinton, N.J., and Sun Valley, Idaho this summer. There are still a few open dates on my speaking calendar next winter, provided the locations are in Bermuda, Bahamas, the South of France, Hawaii, and other exotic ports of call.