Tuesday, April 05, 2005

Gas & Oil at a Glance: 040505

Early last week, I had the sense that oil prices were going to be easing off a bit. In fact, I still do. But, as we all know, that didn't happen in the last seven days.

As has been occurring a lot lately, marks never before seen were reached. Crude oil surged, approaching the $60.00 per barrel price, later slacking off to close at $57.01 when trading ended yesterday. Regular Self Serve Unleaded gasoline also continued its flow uphill. According to the Energy Information Administration's survey, the mean for gas nationwide set another nominal record, coming in at $2.21.7 as of yesterday.

Since the beginning of 2005, when gasoline dipped to $1.77.8 – at the time it was a nine month low - it has now escalated a robust 43 cents in a time frame just barely exceeding 90 days. Taking a quick look at the numbers going back to the later months of 1990, I was not able to find such a substantial rise over so short a period.

One of the statistics that I look at for this report, the 'Gas to Oil Price Ratio' diminished ever so slightly, meaning that crude is taking a somewhat larger share of the money spent for petrol at the pump. But that difference is so minimal as to not be significant. Last week the GOP Ratio stood at 1.67, and this week it eased to 1.63.

With the price for gasoline rising, the 'Spread' - the cost for a gallon of gasoline after the amount paid for a gallon of oil is subtracted – stayed just about the same as last week, going down by less than a penny to end Monday at 85.96 cents.

This suggests that there is still more room for gasoline to rise further, as long as oil sells in the middle to high 50's. Over the last five years, the Spread in the second quarter of the year has varied considerably, from 76.24 cents in the recession year of 2002 to 101.09 in a more prosperous 2004. The average for the entire period has been 88 cents.

Given that the U.S. and the world economies are presently in a mode of expansion, the Spread data leads me to think that perhaps there's room for another dime upward for gasoline. It's my guess that the Spread won't test $1.00 or more as it did last year, because from what I'm picking up, supplies of both oil and gasoline are believed to be in decent shape.

In the midst of 'headline shock' stimulated by a reputable source, Goldman Sachs, with the firm saying that oil has the potential to gush above $100 a barrel, the obvious question becomes: Where crude oil will be going from here? Note that, in the context of this ruckus raising prediction, according to AMEInfo, the investment banking firm was posing such a prospect as “part of a multi-year period of high prices”, not as a train wreck due to happen beyond the next curve.
Incidentally, Goldman's revised estimate for oil prices in 2005 was $50 per barrel and $55 in 2006.

Overall, the consensus seems to be that supplies are adequate at the moment. Plus, I don't get the feeling that, even with the amplified call for petroleum products, it is not to the extent that oil will be driven to extreme heights. There also seems to be an enlarged element of speculation driving events at this point, such as what appears to be panic buying on the part of some airlines and fuel distributors, as was noted in a DetroitNews article.

My bottom line: I think that oil prices will stay close to or within the $50.00 range, but barring a significant disruption in production, will not go a whole lot higher. With respect to gasoline, although it is certainly possible that we will see $2.50 a gallon in the months to come, if it happens, it won't last forever. Citing how consumption was crimped during the middle of last year when gas prices soared, IFR Energy Services analyst Tim Evans, quoted in the Detroit News story mentioned earlier, says that, ". . . we could see retail gasoline prices rise to the $2.30-2.40 level on a nationwide average, but (retreat) back to less than $2.00 by the 4th of July." That's the general direction of my thinking.

One parting note: If you were wondering, as I have, what Americans are anticipating in terms of their energy costs, a Gallup poll released on March 29, 2005 reveals that three-fourths of those surveyed believe the high prices are here to stay. Sorry, for the lack of a link to this report. A few days ago, I was somehow able to access the document and took a couple of notes. Later, I couldn't get back into it again. The second time around, I was informed that a paid subscription was required.

For further background about this report, including a description of the methods that I use for it, please refer to this post. See ya next week.


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