Tuesday, May 17, 2005

Gas & Oil at a Glance: 05/17/05

The story in fossil fuels for the past seven days is less the modest adjustment in the national average cost of gasoline and more the conspicuous drop in oil. In the United States, Regular Self-Serve Unleaded was going for $2.16.3 per gallon as of yesterday, according to the EIA, the acronym for the Energy Information Administration. That's down a paltry 2.3 cents compared to the prior week.

But, after 12 straight weeks of buyers paying above $50 for a 42 gallon barrel, crude oil, as measured by the West Texas Intermediate grade that is traded in Cushing Oklahoma, finished at $48.61, descending a substantial $3.42 from the previous week. This downturn is the largest since oil sold for $41.26, on December 27 of last year, $4.31 less than the prior seven day period.

The two figures that I calculate ended on the up side. Since the current cost of oil makes up a lower proportion of the total cost of gasoline, my Gas to Oil Price Ratio – the GOP Ratio for short –
figures out to be 1.87. For those times when oil is priced in the mid $40's or above, the GOP Ratio is steep. In fact, it is the highest that it has ever been with crude commanding at least $45 a barrel.

In concert with the GOP Ratio, the 'Spread' moved right along an upward path. Expressing the difference between a gallon of gas at retail and that for the same amount of oil, the Spread was greater by a bit over six cents, compared to May 10. Once again, it edged over the $1.00 hurdle, where it has been lodged for three of the past five weeks. To give you a feeling for how abnormal a spread above $1.00 is, going back over weekly data covering more than 14 years, there are only 18 other instances of this.

Along with one more indicator, all of the above bodes for lower prices at the pump. The other signal that I've started paying more attention to over the last month is the contrast between the two sources that report gasoline prices on a daily basis, GasPriceWatch.Com and the older and often referenced American Auto Association's Fuel Gauge Report. On early Tuesday morning, as this article is being written, the GPW is showing a national mean of $2.10, while AAA shows it to be $2.16.

It is a rare event when there is not a variation of some magnitude between the two, but this discrepancy of 6 cents is larger than usual. So far, GasPriceWatch has been ahead of the curve, revealing movements up or down before the AAA or the Energy Information Administration do. As time goes on, these two organizations eventually validate the price shifts that GPW showed earlier, for the most part.

As to how long this attrition at the pump will last, I'm sticking with the expectation that I professed a couple weeks ago. What we're putting out for fuel should continue to diminish through the month of May. Then, we should see gasoline prices turning around and heading the other way, with the June kick in of the 'Summer Driving Season'. Also, consider the EIA's most recent take on petroleum. Their people note that the desire for black gold remains strong across the globe, with those in Asia presently shelling out more for the stuff than those of us in the West. Even though availabilities of this resource in the United States are ample at this time, with growing demand intact and with conditions balancing out as they inevitably do, it would appear that we'll be drawing down our domestic supplies fairly soon.

Note that mine is not necessarily the prevailing outlook. The division of opinions about what's going to happen seems to be increasing. There is a credible crowd with the view that oil supplies will increase and that gasoline prices, already having peaked, are poised to fall further.

But right now, I'm on the other side of the fence, and the question in my mind is less whether gasoline will begin its re-escalation in the next few weeks, but to what extent it will. At least I'm not as inclined to expect that prices will expand towards $2.50 as I was a couple of months ago. In short, my advice is to relish this reprieve while it lasts, and hope that I'm on the right track about the reversal not being too extreme when it does come to pass.

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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