Tuesday, May 24, 2005

Gas & Oil at a Glance: 05/24/05

While gasoline dipped for the sixth straight week, the consensus about where its price is going to go doodled. Yesterday, according to the Energy Information Administration (EIA) the average cost of Regular Self-Serve Unleaded stood at $2.12.5 per gallon across the United States, less by 3.8 cents in relation to the week before. This is down 15 and one half cents from the record high that was set onApril 11 of this year, when it closed at $2.28.

On the other hand, crude oil was even. On May 16, it stood at $48.61 – my benchmark is the West Texas Intermediate grade that is traded in Cushing, Oklahoma - budging a meaningless nickel to finish at $48.66. This is the second week running that oil has sold for under $50.00, after enduring nearly one fourth of a year above that mark.

My two specialty statistics, the 'Gas to Oil Price Ratio' – the GOP Ratio for short – and the 'Spread' were down, but not by much. As the table at the end of this article reveals, the GOP, which expresses the portion that the current cost of crude figures into the
present price of gasoline, divides out at 1.83. That is still large
when one looks at those times when oil sells for $45 per barrel or
more.

The Spread, which is the amount that a gallon of gas goes for after factoring out the cost for a gallon of oil, stood at 96.64 cents as of yesterday. On a week to week basis, that's a loss of almost four cents. But, as with the GOP Ratio, the Spread is well above where it typically stands.

Also, as I've been doing for several weeks now, I'll cite an indicator that I accidentally came across, the variation between the mean gasoline prices reported by GasPriceWatch.Com (GPW) and the American Auto Association's Fuel Gauge Report. It has significance to me, because the two figures differ most of the time, with GPW, be it high or low, on the extreme, showing a tendency to predict the direction in which the AAA's numbers go. Early Tuesday morning, as this article is being composed, the GPW is showing a national mean of $2.06, while the AAA is at $2.12.1, as is virtually always the case, emulates the Energy InformationAdministration's figure.

With the GOP Ratio accompanying the Spread on the upside, along with the the GPW standard again positioned below its American Auto Association counterpart, these are signs to me that gasoline prices for the very near term should trend lower. But how long that movement will
continue is another question. Three weeks ago, I wrote that I expected the toll for petrol to be diminishing during the month of May. So far, so good. But following the end of the month, I forecast a return to rising prices.

Meantime, I have clung to that prediction and will stay with it. Just recognize that my expectation is seemingly being embraced by a diminishing number of the experts. Yesterday, for the first time that I am aware, I understood Trilby Lundberg of the legendary Lundberg Survey to change course, saying that she believes we'll see gasoline's ongoing descent. This eventuality is envisioned even with the advent of the June, July and August quarter, when warmer weather normally spurs a demand increase,with people out and about, driving additional miles.

Plus, there are recent reports out alluding to oil's value evaporating, such as a Kuwaiti oil minister conveying contentment even if crude cascades to the $40 to $45 per barrel range. Couple that with another take, that supplies will remain abundant as a slowing world economy dampens demand, and you have some good reasons to expect relief. To top off this line of thinking, looking out beyond this year, it should be mentioned that the European Bank for Reconstruction and Development is expecting oil to trade between $30 and $40 in 2006 and 2007.

On the opposite side of the tank, a lesser but nonetheless large crowd remains that supports my perspective, like the investment firm of Goldman Sachs. This firm is calling for crude's charge to even out at $53.50 for the rest of the year, which implies that gasoline will again become more expensive. Or, consider the report that the the Organization of Petroleum Exporting Countries' chief is hinting that we may see the existing all out production curtailed by mid June.

When it's all said and done, what keeps me thinking this way: We are well within are in an era when people worldwide want to use this form of energy to a greater extent, while the quantity of the commodity available for consumption is not growing commensurately. To me, be it later if not sooner, that signifies price pressure in an upward direction.

Whichever side you may choose to take about the direction of gasoline, you'll be in good company. And I won't blame you for hoping I'm wrong.

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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