Oil at $50, Heading to $45 or Lower

Oil is pushing to new lows and is down nearly $100 / bbl from recent highs. Can it go any lower? Some data seems to say yes.

The crack spread between gasoline and oil futures, for example, has recently gone negative (chart below), implying the cost of gasoline is less than the raw material it is made from. Does that mean that gasoline is too cheap or that oil is too expensive?

John Kilduff, SVP and Co-Head of MF Global, told me that the crack spread is unbelievably negative, hovering right now at negative $7. "Historically, that number should be between positive $5-6," explained Kilduff. "Gasoline prices are way ahead of crude right now. At comparable levels, we project oil at about $46 / bbl," adds Kilduff.

Looking at retail gasoline prices, you get similar results. Below are two charts: one showing the national average price of retail gas / gallon (per the EIA) and crude oil, the second shows the relative price of one to the other in $/bbl. Over the past 10 years, the trend slopes downward, showing that gas has fallen faster than oil. The last time oil was near $50 /bbl, retail gas was about 10 cents more per gallon than it is today.

The average multiple of retail gas to crude oil for the past 10 years is 1.9. With the average national price of gas at $2.03 / gallon as of Nov 17, oil would need to be ~$44 / bbl - just under Kilduff's estimate.

Using the 20 year average of 2.2, the price of crude should be even lower - $39.52 / bbl! Rebecca Jarvis reported on CNBC this morning that Deutsche Bank is projecting oil at $40 /bbl as well.

Some energy companies falling heavily with oil include:

  • Peabody Energy
  • Consol Energy
  • El Paso
  • Weatherford Intl
  • Williams

Comments? Send them to bythenumbers@cnbc.com