Crude Down, Gas Up

by Robert Farago

Published: May 30th, 2008

CNNMoney reports that the price of crude oil may finally have spiked– you know, if you look at it that way. "Crude oil prices retreated into the $126-a-barrel range Wednesday after dropping almost $5 a barrel from intraday highs to settle at $128.85 on Tuesday." While CNN is almost happy to make the link between dropping crude prices and "relief at the pump," it's worth noting, uh, what they note. "Gas prices have been pushed to record levels in the past year on the back of record oil prices. As the price of crude oil has more than doubled, gas prices have increased by almost a quarter." Anyone see an ominous disconnect there? Anyway and meanwhile, gas prices hit record highs for the 21st day in a row. "The nationwide average for a gallon of regular unleaded rose to $3.944, up 0.7 cent from $3.937 Tuesday." Detroit shouldn't pop the cork on those SUV-shaped champagne bottles just yet. Most analysts reckon that increased demand worldwide will prevent the price of crude from returning to last year's levels. Ever.

Robert Farago

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Ihatetrees on May 30, 2008
Pch101: Electricity was, and continues to be, a localized and regional market. Enron controlled the trading exchange, and could directly manipulate the result. Excellent point. Also, unlike oil, electricity cannot be stored (in marketable amounts). For every 'on' switch, there is a generator spinning somewhere. Also, electricity price does not vary with demand. There are generation plants whose sole purpose is to supply high demand days - and most consumers pay the same price on such days.

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Landcrusher on May 30, 2008

Alex, No one here thinks the domestic oil chiefs are angelic. That's a straw man. There are many who think they are not demonic though. There is an area in between. The domestics do NOT control the price of oil, PERIOD. Can't do it. If you want to blame an American, find some of the guys who helped form OPEC. They have been retired for years though. OTOH, if you want manipulation, simply look at foreign governments and their nationalized oil companies. They could, and have manipulated prices in the past. Most commodity products ARE manipulated in legal ways. The oil companies don't push those tricks nearly as far as other commodity companies (like chips, paper, plastic, and many others) do. I have never seen an oil company announce a price increase in advance like is done in so many other industries. There were many folks here in Houston who knew something was fishy at Enron long before the news broke, and even before it became a household name. No one I knew really new the dirt, but many of us had lots of suspicions. Not everyone was eager to get on the Enron account at my company, and those who jumped on that boat lost money and even jobs when it sunk. As a salesman, I heard how their commissions were being paid to the traders, and I couldn't figure out how it worked until the end when we all learned about mark to market accounting and how they were playing their statements. Lastly, The so called "deregulated" energy markets are anything BUT deregulated. They all seem to have hundreds of little regulations that are open to exploitation (except California, where the whole market was so badly designed a 5th grader could have played with it).

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Tdoyle on May 31, 2008

I believe the Serenity Prayer applied when it comes to fuel prices right now. God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference. Living one day at a time; Enjoying one moment at a time; Accepting hardships as the pathway to peace; Taking, as He did, this sinful world as it is, not as I would have it; Trusting that He will make all things right if I surrender to His Will; That I may be reasonably happy in this life and supremely happy with Him Forever in the next. Amen. --Reinhold Niebuhr

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Anonymous on May 31, 2008
Last week I wrote that we could see a drop in the price of oil as speculators seemed to be storing oil in very large tankers and "slow steaming" them to port in a bet that prices would rise. When everyone is on the same side of the trade, the time is right for a reversal. This is especially true when there is a large potential supply sitting on the sidelines. This week we briefly look at this prediction, and perhaps even more ominous problems for commodities in general, at least in the short run. The new turn our attention to the euro. It will make for an interesting letter. First off, oil dropped about 4% yesterday and is down almost $10 from its high only a week ago. Yet supplies of crude oil surprisingly dropped by 8.8 million barrels yesterday. Oil shot up on the news as both those who were short covered their bets and even more people piled into the long side of the trade. But then the EIA report gave the rest of the story. It seems the shortfall "was due to temporary delays in crude oil tanker off-loadings on the Gulf Coast." And as Dennis Gartman noted this morning, "officials at the Louisiana Offshore Oil Port (LOOP) said that some crude oil tankers cancelled scheduled deliveries last week." The owners of the oil in those tankers are now down about 6-7%, whether it is speculators in the pits or the actual trading companies. I talked with George Friedman of Stratfor this morning, and he says that the supply of tankers is even tighter, which suggests there is even more oil on the seas looking for a home. Crude oil prices could be under pressure in the next few weeks and months as whoever holds that oil is going to want to get it onshore somewhere and out of very expensive tankers. http://www.frontlinethoughts.com/article.asp?id=mwo053008

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