Tuesday, June 07, 2005

Gas & Oil at a Glance: 06/07/05

While oil was spurting substantially for the second straight week, gasoline's nudge was negligible. The U.S. national going rate for Regular Self-Serve Unleaded was $2.11.6 per gallon across the United States, an increase of 1.9 cents from May 31. This is the first move to the expensive side since April 11 of this year, when gas sold at its all time nominal high of $2.28.

Oil, which only two weeks ago was being bought at below $50 a barrel, has gushed upward by almost $6.00 during this abbreviated time span. Yesterday's close stood at $54.49 for 42 gallons of West Texas Intermediate Crude. This kind of fluctuation doesn’t happen often, but neither is it extremely rare. The last time a bigger break out took place over a 14 day period was on January 17 of 2005, when oil spurted skyward by $6.30.

One of my statistics, the Gas to Oil Price Ratio, which expresses the extent to which oil contributes to the price of gasoline, came in lower, at 1.63, as would be expected when crude goes up a lot and gas only seeps ahead minimally. Restating what I wrote in the prior issue of 'Gas & Oil at a Glance', the lower the GOP Ratio gets, the better the possibility that gasoline will become more expensive in the near term.

The other number that I regularly emphasize in this column, the 'Spread', works in tandem with the GOP Ratio most of the time. The Spread is simply a numerical statement of the charge for one gallon of gasoline at retail, after subtracting the cost for one gallon of oil, providing a picture of how much is being kept by those who refine and market motor fuels. This week, the Spread was down to 81.86 cents, less than it has been in two and one-half months. It decreased from last week by about four and a quarter cents.

As I've been doing during the last several weeks, I'll mention the often reliable 'leading indicator', the national petrol prices that are continuously updated by GasPriceWatch.Com (GPW). It is meaningful to me, as I have found that, whether on the high or the low side, GPW's prices tend to predict the direction of the other more prominent sources that publish the same figures, those being the Energy Information Administration and the Fuel Gauge Report, put out by the American Automobile Association. Around the time that I was producing last week's report, GasPriceWatch, supported by an army of volunteer spotters, was showing gas to be selling for $2.02 a gallon. At this time on Tuesday morning, GPW is coming in at $2.09. Thus, as this organization reveals it, the downward trend in gas prices has reversed.

You'll excuse me if I take this moment to blow my own horn - hopefully not further exacerbating the greenhouse gas problem in so doing – but I believe this is the fifth straight week in which I've called the very near term direction for gasoline correctly. Prediction is the riskiest of all businesses - and I certainly haven't developed a 'prophet complex' yet - but I am pleased with the results. In my opinion, it validates the value of the GOP Ratio and the Spread as a two useful numerical tools for those who want or need to project where the retail cost of gasoline is heading.

Now that I've finished my little back patting exercise, what about the future? As we proceed into the month of June - and probably into July and August – it looks as if more of our wealth will be guzzled by gas. Demand does not appear to be favorable to lower prices, since, with the additional driving done during the summer, people are purchasing fuel in larger quantities. Link that with crude oil back up in the mid 50's, and it bodes for a gallon of gasoline selling in the $2.30's.

However, to temper the above, I'm not so sure we'll see all that much of a spike. From my regular reading about the energy business, I get the impression is that OPEC and their contemporaries love letting the crude float at $50, but when it proceeds into the territory of $55, they get antsy. Signs are that crude around $50 has been fairly well tolerated by the global economy. Yet, black gold five bucks or so beyond, the producers seem to fear, could bring economic slowdowns closer to reality, raising the ominous eventuality of collapses in the worth of what they bring to market.

Oil in that realm could also spur customer countries to intensify the quest for alternatives. Bottom line, I believe that those who hold the raw resource needed to fuel our vehicles will do everything they can to keep their commodity right around half a C-Note. If they can't do it in reality, they'll resort to bluffing, by talking about expanding the production of what is immediately available for exploitation and by decreeing that they're ambitiously exploring for new supplies.

One other consideration that should keep prices in the United States from ratcheting completely out of sight is the strength that we have been seeing lately in the dollar against other world currencies. A greenback having a greater worth makes oil cheaper in this country, as that's the denomination of choice for its exchange.

To summarize my expectations, look for gas to go higher but not exorbitantly. Relief, that now to me meaning a retreat below $2.00, may come only after that last drop of summer sweat evaporates.

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


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