Heading into yesterday’s session spot NYMEX crude oil for August delivery had yo-yoed in between a 79.38 high and a 71.09 low. Yesterday the contract peaked at 76.43 and troughed at 74.52 before settling at 74.95. Suffice it to say, $75 does indeed appear to be a magnet.
To wit, yesterday's session was the third in a row in which the contract traded on both sides of this figure. Furthermore, since coming off its +$87 highs in early May, spot barrels on the NYMEX have closed within 3% or $2.25 a barrel (either side) of $75 in 27 out of 45 (60%) sessions.
We are now beyond the U.S. 04th of July holiday, i.e. we are in the peak driving season. From a historical perspective, gasoline prices at the pump now begin a seasonal ebb through the remainder of the summer and into the early fall. That does not bode well for oil bulls.
On one hand, based on past relationships, $75 oil translates into around $2.80 at the pump. That is cheap relative to an inflation adjusted (real) price. However, we know from the run up in oil prices over the last five years demand elasticities begin to wane inside $2.90 and $3.30… and that was before the economy shed over 8 million jobs.
Moving on, hope is growing that BP is close to, as Obama would say … plugging the damn hole. Last night reports ran that the company successfully lowered a containment cap over the well. Within the next two days the company will know if pressure is such that will allow the cap to be sealed and finally plugged with cement next month.
Let’s keep our fingers crossed.
In the meantime, Secretary of the Department of the Interior (DOI) Ken Salazarissued new suspensions of deepwater drillingon the Outer Continental Shelf (OCS) yesterday. However, shallow water drilling operations can continue to move forward.
More importantly, for the first time since the Administration came under friendly-fire for its (perceived) slow response, the White House appears to have toned down its rhetoric. In the official DOI statement, Secretary Salazar remains “… open to modifying the new deepwater drilling suspensions based on new information…”
As discussed in today’s issue of The Schork Report, we venture to add, +$3 at the pump on the eve of the November mid-term elections will help increase the DOI’s openness to deepwater drilling.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.