Tuesday, April 19, 2005

Gas & Oil at a Glance: 04/19/05

After eight consecutive weeks of gasoline price rises, a bit of expected relief came about. Still selling for a near record average of $2.23.7 for a gallon of Regular Self Serve Unleaded in the USA, the going rate at the pump did drain down by 4.3 cents, compared to last week. Likewise, the cost for crude oil dipped by $3.34 for a 42 gallon barrel of the West Texas Intermediate grade from seven days ago. That's now down $6.33 since it hit a nominal record high on a week to week basis on April 4 of this year.

Relatively speaking, that leaves the two specialty statistics that I derive at extreme levels. The Gas to Oil Price Ratio – GOP Ratio - now divides out at 1.87, the highest that it has ever been with crude selling for $50.00 or more.

The 'Spread', the difference between the cost of gas and oil for one gallon of each commodity, stands at 103.77 cents as of yesterday, the largest it has ever been with oil in the $50.00 range. And in a larger context, the Spread remains extraordinarily high, regardless of oil's going rate. Among 760 data points that I have available for evaluation going back to August 20 of 1990, it has exceeded this figure on only eight occasions.

While my technical indicators are up, leading me to believe that additional downward pressure on gasoline prices is due to come, what about the supply situation? The consensus that I 've encountered seems to be well expressed within This Week in Petroleum, the Energy Information Administration's most recent report dated April13: “Recent EIA weekly data show ample gasoline inventories and strong gasoline production as refineries emerge from turnarounds. In addition, petroleum markets have begun to focus on high and still rising U.S. crude oil stocks, which along with comfortable levels inEurope, provide evidence of high production by OPEC members.”

Thus, given my standard disclaimers that no one – myself especially – can foretell the future for sure and that all bets are off should a supply shock of some kind transpire, a further relaxation in what we pay for gasoline in the next few weeks seems to be in the cards. Unfortunately, I doubt that it's going to be all that much, perhaps no more than a dime. Remember, available petroleum stocks remain fairly tight and I am aware of no compelling signs implying a large falloff in demand.

A little further out, in the next couple of months, I'll be paying attention to the demand situation. With supplies at this time about as stable as one could wish, it's going to be interesting see for the extent to which the summer driving season drives up petrol purchases. If we do see the generally expected increase, then look for gasoline to ascend again, within the $2.30 to $2.50 range. I'm just wondering if we may be reaching the point in the U.S. where discretionary activitiesinvolving the use of energy may become suppressed to some extent.

One last thought: Who has a vested interest in keeping oil from inflating far beyond its present levels? The Organization of Petroleum Exporting Countries and almost everyone else who provides us with oil. As I've been following ebb and flow of oil prices, I get the impression that the talk of raising output heightens whenever it's selling in the mid 50's or above – thereby influencing lower prices - and diminishes as they head south towards the half century mark.

My view is that OPEC and their colleagues will be pleased as punch to keep selling oil at or near $50.00. Indications are that world markets have tolerated these charges, their profits are more than adequate and they have a motive to keep their black gold from rocketing higher. Not that these guys necessarily have our well being at heart, but they are very aware that their product becoming too pricey will stifle economic growth, and that consumer adjustments will take place at an accelerated pace. In those conditions, a severe reduction in oil's value would not be out of the question, a circumstance they want to avoid like the plague. If nothing else, OPEC's present posture islikely to help keep the worst case from happening.

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




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