Why are we here? Where are we going?
Well, we are almost certainly headed higher in the first part of the month, thanks to international money managers who believe that crude oil is one of the safest places to park money as the Dollar struggles; inflation rears its head, and the perception of a voracious appetite for transportation fuels in China and India steadily increases.
Crude oil starts this first full April week about $42 bbl higher than April 7, 2007. Since there are 42 gallons in a barrel, that yields a convenient year-on-year increase in raw costs of $1.00 gal. But gasoline futures are up “only” 63cts gal during the same period, so manufacturing gasoline is nowhere near as profitable as it was during the 2004-2007 refining renaissance.
I’m betting that we’ll see the peak for crude oil futures and gasoline futures in the next six weeks. I suspect that crude oil peak will be in the $112-$120 bbl range, and believe that gasoline futures will top out just under $3.00 gal. That translates into a retail peak (usually about two weeks after the futures’ apex) of some $3.50-$3.80 gal.
Speculators Aren’t Responsible, Government Economist Says
Last week didn’t engender much confidence in our government’s oversight of the petroleum business. Most of the hearings on Capitol Hill saw finger-pointing and grandstanding by congressmen playing to their constituents. All pretty standard stuff. However, I can only be outraged by comments from a gentleman from the Commodities Futures Trading Commission who testified about energy futures.
In testimony before the Senate Energy and Natural Resources Committee, CFTC chief economist Jeffrey Harris noted that “there is little evidence that changes in speculative positions are systematically driving up crude prices,” adding that “fundamentals provide the best explanation for crude oil price increases.”
I’m not sure if I should quote the great statesman Gary Coleman--“What you talkin’ about Willis?” --or the Enron employee who when told by Ken Lay that offshore partnerships were entirely aboveboard then queried:
“I would like to know If you are on crack? If so, that may explain a lot.”
One can argue about whether or not the flood of money pouring into crude oil futures (and other commodities that represent natural resources) represents active speculation, or more passive investment. But it is clearly money flow that has funded this surge to $100-$111.80 bbl.
Let me share a calculation derived from some internal numbers released by the CFTC last Friday. The data shows that among various funds, commodities’ pools, and other “non-trade” players in the futures & options market, there is about $25-billion more money bet on a higher price outcome than on lower prices.