Average U.S. gasoline prices begin 2012 just under $3.28 gal, the highest number to ever mark the beginning of the Gregorian calendar. Last year’s $3.07 gal high is relegated to second place. My detailed forecast, provided later in this post, will suggest why I believe that this year will see both higher highs, and lower lows than what we witnessed in 2011.
(For the record, $3.985 gal represented the 2011high on May 5, and coincidentally, the low water mark occurred precisely one year ago today at $3.0716 gal)
The annual average for WTI crude oil - $95.11 bbl in 2011 – is misleading. Offshore crude, as embodied by Brent North Sea crude futures fell just shy of $111 bbl on the year, and briefly flirted with $126 bbl. The first business day of 2012 has seen WTI fetch about $102.50 bbl with Brent assessed above $111 bbl.
We are still living in the “live ball” era for oil and gasoline prices. U.S. street prices for unleaded regular averaged $3.5104 gal in 2011, the highest annual number of all time, and more than twice the price average seen in the first four years of the century. Americans spent approximately $481.3-billion on gasoline in 2011, easily breaking the $448-billion standing record from 2008.
The numbers below, yielding averages in the U.S. through this century are stunning. Draw your own conclusions.
2000-2011 Annual U.S. Gasoline Averages
2000 - $1.5008 gal
2001 - $1.4397 gal
2002 - $1.3497 gal
2003 - $1.5587 gal
2004 - $1.8427 gal
2005 - $2.2654 gal
2006 - $2.5667 gal
2007 - $2.7892 gal
2008 - $3.2512 gal
2009 - $2.3481 gal
2010 - $2.7819 gal
2011 - $3.5104 gal
Here’s the quick script for 2012. We’ll start off the year with some increases, thanks to a de facto tax increase that occurred when the ethanol tax break of 4.5cts gal disappeared as the Times Square ball dropped on New Years’ Eve. A few new state and local taxes that took effect on that date might also deliver a small lift to street prices. New investment money comes into crude oil and refined products’ futures this week, and that inevitably brings a “sugar rush” of sorts to the pricing landscape.
Worries about the Strait of Hormuz and Iran’s threat to close this “choke point” could worry prospective energy futures’ sellers early in 2012. But traders navigating the even more formidable choke points of the bridges and tunnels in New York may have more to do with the 2012 price performance. The traffic of money moving from commodity desks and hedge funds into oil futures and options could be the major ingredient of any first half 2012 advance.
Ultimately, most of these short term factors could give way to what I call “Jan-o-pause.” Cold temperatures and the arrival of bills from yet another holiday season of conspicuous consumption could make for ornery stay-at-home consumers through Groundhog Day. We might see January gasoline demand plunge to as little as 8-million barrels per day, or 336-million gallons each day for you gallonistas. As recently as 2007, the standard for measuring U.S. demand was nearly 400-million gallons per day. January brings crappy movies and crappy movies and stumbling fuel prices tend to overlap.
But somewhere between the Grammys and the Oscars, the gasoline market (and perhaps, the crude market) will trend considerably higher. International worries about a second Arab Spring will combine with domestic concerns about U.S. refinery maintenance, and the closure of at least two critical East Coast refineries and deliver a significant bout of what I coined Petronia in 1999, a neologism subsequently stolen by George Clooney and his connections for the incomprehensible Syriana in 2005.
Petronia is akin to the flu, and the most difficult part of this forecast is to diagnose this year’s strain, its staying power, the damage it might do to the aggregate consumer psyche, and the aftermath.
Predicting Petronia’s Path in 2012
Mekka Lekka Hi, Mekka Lekka Hiney Ho. Long live Jambi.
You probably won’t find another U.S. oil analyst that invokes the genie from Peewee’s Playhouse in putting together an annual forecast. But a twelve month projection smacks of witchcraft, magic, alchemy, and myth as well as some petroleum meteorology.
My earth & space science teacher at Pt. Pleasant High School imparted a rote memory that “weather is a result of the uneven heating of the earth.” Petroleum price weather has a similar definition but human behavior is added to the mix of supply and demand inequality across the globe. In many cases, human behavior is compromised by the desire to pursue or predict outcomes that individuals find pleasing, or less painful.
We don’t have centuries of data for oil prices, but we have decades worth of oil futures’ performance records. The most predictable of all oil price phenomena is the tendency for a brisk autumn-to-spring rally for gasoline futures, which in this day and age are represented as RBOB futures.
Over the last 27 years, gasoline futures have recorded an average 61.35% lift in value during this seasonal period. The average rally this century has been 81.8%; the ten year rally average is 83%; and the five year seasonal appreciation averages 87.61%.
Last year, incidentally, saw an increase of 71.4% and that followed the 2009-2010 appreciation of 52.5%. The all time record seasonal gain of 169.1% occurred as we emerged from recession in 2008-2009. Gasoline futures are the predominant determinant of wholesale gas prices, which in turn are the major determinant of retail prices, so predicting the future of futures’ prices is the most critical ingredient for the final outcome.
Here’s a quick and dirty version of gasoline futures rallies in the last dozen years:
21ST CENTURY GASOLINE FUTURES’ RALLIES
YEAR CENTURY AVG. 10 YEAR AVG. 5 YEAR AVG.
2000 88.0% - - - -
2001 63.2% - - - -
2002 82.9% 82.9% 82.9%
2003 69.6% 69.6% 69.6%
2004 89.4% 89.4% 89.4%
2005 69.0% 69.0% 69.0%
2006 81.5% 81.5% 81.5%
2007 83.9% 83.9% 83.9%
2008 61.2% 61.2% 61.2%
2009 169.1% 169.1% 169.1%
2010 52.5% 52.5% 52.5%
2011 71.4% 71.4% 71.4%
AVGS 81.8% 83.0% 87.61%
I have faith in numbers, but I also recognize that distortions happen in temperatures and they are quite common in price performance. New Jersey saw 55 degree F. temperature highs on New Years Day. An average temperature appreciation from January 1 to July 1 would probably be in the realm of 60 degrees, but 115 degree temperatures might melt Snooki’s make-up at the Jersey Shore this summer.
Point: An “average” rally is not likely.
As we begin 2012, it looks as though $2.444 gal is a strong candidate for the 2011-2012 gasoline futures’ autumn “bottom.” That price occurred on November 25, 2011, and the numbers have moved some 25cts gal higher in just under six weeks. If this number is the bottom, it is the most colossal bottom on record. (think Governor Chris Christie)
The gains of the past aren’t realistic. But recognize that the smallest gasoline futures rally we’ve seen in the last 25 years was the 15% increase registered in 1997. Gasoline futures bottomed at 60cts gal during that cycle, and peaked at 69cts gal. If that seems like a boring season, it was. The English Patient won the Academy Award for Best Picture, so boring was kind of the Heroin Chic in markets and movies that year.
I don’t think a 15% rally is reasonable, nor do I believe that increases in the 80% neighborhood are in store. (An 80% futures’ increase would push U.S. retail gasoline to nearly $5 gal).
What is reasonable? Let’s look at the bouillabaisse of bearish/bullish ingredients. In the bearish column we have sovereign debt woes, a tapped-out U.S. consumer, stubborn unemployment, new car efficiency, migration to urban areas and working-from-home. In the bullish column we have incredibly brisk demand growth from emerging economies, robust export demand, a hornets’ nest in the MENA countries, closures of refineries on both sides of the North Atlantic and the typical mess that comes with the transition from winter to summer gasoline, all against the backdrop of heavy maintenance.
I’d say that the scope of a typical spring rally might add 40-45% to the autumn low of $2.444 gal.
That would result in a gasoline futures’ top of about $3.42-$3.55 gal. With a few cocktail napkins and a Sharpie, I can conclude that such a rally would push U.S. retail gas prices to $3.90-$4.25 gal. The most likely peaking time would come between the April 13 release of The Three Stooges, and Cinco de Mayo.
So, if I were Danny Sheridan posting the Vegas line, I think I’d put an over/under number of about $4.05 gal on the U.S. gasoline peak this spring. If you live in California, Hawaii, Alaska, or even Connecticut, you might pay more. If you live in the Great Plains or southwest, you might pay substantially less.
How does 2012 end?
It is much easier to predict the annual Petronoia rally than it is to reasonably forecast the second half of 2012. The factors that might lead to a 40% or more increase for U.S. gas prices are temporary. Investment banks don’t regard $3.75-$4.25 gal pump prices as apocalyptic, but millions of motorists turn apoplectic when they see $4 gal on those high- rise LED signs.
One old saw that might be retired this year is something like “Europeans have been paying $5-$7 gal for gasoline for ten years, and it doesn’t seem to bother them.”
There are economic and political consequences for high prices. Lofty gas prices will be on the front page of newspapers and at the top of the prime time news coverage for networks and cable through portions of the second calendar quarter. I suspect that once prices hit their sloppy drunk peak, there will be a hangover much like we saw in portions of 2008. In 2011, gasoline prices ended autumn at $3.206 gal, less than 20% below the $3.985 gal high.
My unscientific, non-meteorological suspicion is that by the second half of 2012, gasoline will be a surplus global product, trading for a very modest premium to crude oil. I’d be surprised if the U.S. doesn’t see a return to sub-$3 gal gasoline in the second half of the year.
But I could be wrong. Long live Jambi.