We have a guest blogger today. Tom Kloza is Chief Oil Analyst at OPIS (Oil Price Information Service) and has his own blog. Tom has been writing about downstream oil markets since 1975 and was among the founders of OPIS over 25 years ago. We appreciate his posting today.
For fuel prices, this month will almost certainly be the cruelest month, or the “cruellest” month as poet T.S. Eliot preferred to call it in "The Wasteland." The first full week of April begins with Americans paying about $287-million more per day for gasoline than they paid a year ago, and $712-million more than was meted out on this day five years ago.
The average nationwide gasoline price stands at $3.339 gal, up 57.6cts gal from last year, and some $1.70 gal above prices on the same day in 2003. Every single state finds prices up at least 41cts gal from April 7, 2007, and if you are planning to go into the wild in Alaska, you will find prices there 91cts gal higher than they were twelve months ago. Two out of three U.S. states have surpassed the “tipping point” of $3.25 gal, a number which has OPIS has determined has clearly provoked cutbacks by consumers in recent history.
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.
Money represents the most powerful performance enhancing substance in the oil markets. If government watchdogs don’t make this connection, they are guilty of channeling the logic of major league baseball’s Bud Selig, who initially thought that homeruns and slugging statistics were up because of better conditioning by athletes.
Oil & The Economy
We generally have to wait about three weeks for government data that measures producer prices (wholesale numbers) and consumer prices (retail numbers) but at OPIS, we crunch several hundred thousand data points received electronically each and every day. Here are some highlights of that data for March 2008:
-Americans spent about $247.7-million more each day on gasoline in March 2008 than they did in March 2007. OPIS estimates that the increase from five years ago is now a whopping $626-million per diem.
-Wholesale diesel prices ended March at an all time high of $3.288 gal, and the average retail diesel price was $4.019 gal. The largest increases--of nearly 50cts gal--occurred in northeastern states, but every region saw price advances of at least 41.8cts gal.
-The average nationwide price for wholesale jet fuel in March 2008 was $3.172 gal, up 42.4cts gal from February 2008 and up an incredible $2.235 gal from March 2003, or 238.7 percent.
-Regional retail gasoline increases on a month-to-month basis ranged from 13.6 percent in New England to 26.4 percent in western states. Wholesale gasoline prices were up some 33.1 percent in the month, suggesting that the uptrend in pump prices will persist into early April.
Note: the OPIS data is compiled in a report known as the Transportation Fuel Index (or TFI) that compares fuel prices with the previous month, as well as year-ago and 2003 numbers for a tidy five year perspective.
The five year differences are staggering. Wholesale gasoline prices are up $1.691 gal from March 2003; and wholesale diesel prices have advanced by well over $2.00 gal in that period
It is not coincidence that these numbers have occurred and brought consumer confidence levels down to measurements not witnessed since December 1973.
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