Tuesday, June 28, 2005

Gas & Oil at a Glance: 06/28/05

Gasoline prices continued their trek upward this week, at an increased rate in relation to the last few weeks. As of yesterday, the average gallon of Regular Self-Serve Unleaded was selling for $2.21.5 across the United States, according to the Energy Information Administration. That's ahead 4.4 cents from the prior Monday and is the fourth straight week of increases at the pump. Even so, this amounts to slightly less than 12 cents or 5.6 percent more since May 30, which is puny during a time when oil has erupted by nearly 17 percent.

Oil is again at an all time high, having penetrated the formidable $60 per barrel figure for the benchmark West Texas Intermediate variety. Finishing the day at $60.54 on Monday, its recent upward momentum appears intact at this point, as the main considerations responsible for pushing the sticky liquid skyward – growth in demand, tight supplies and refinery capacity restrictions – are generally regarded as realities.

Crude's current charge is just $1.17 higher than last week, but relatively speaking, gasoline kept pace with this cursory advance over the week. That fact is revealed by the two statistics which I feature in this column, the 'Gas to Oil Price Ratio (GOP Ratio) and the 'Spread'. On the previous Monday – June 21 – the GOP Ratio stood at it's lowest level in almost 15 years. This week, it is little different, turning out to be 1.54.

Likewise, the Spread – the difference between the cost for a gallon of gasoline and that of the same amount of crude oil - has changed moderately, growing by just over 2.5 cents from one week ago. Seeing the Spread amount to a dime or more beyond where it is right now would not be at all unusual, when one considers that its average for all of 2004 approximated 87 cents.

All of the above bodes for prices to continue ascending at your local filling station, unless there is a swift and sudden reversal in what the world is willing to budget for oil. Frankly, it wasn't too long ago when I became convinced that the world's largest supplier group, the Organization of Petroleum Exporting Countries, wanted to keep crude around the $50 per barrel figure. My conclusion has been – and remains - that most of those who make up OPEC realize that, should their product become too costly, a global economic downturn becomes more likely, threatening their pleasantly profitable margins.

On top of that, the search for alternative sources of energy will intensify, ultimately lessening the value of what they have to sell. Yet, for the time being, it seems that the call for the items requiring oil is simply outstripping its availability, across the globe. Many of the indications I see lead me to think that OPEC and the other providers of black gold, try as they might, are incapable of producing in quantities adequate to satisfy all of their potential customers at a dollar amount sufficiently low to ensure a continuation of recent circumstances.

How long this double edged sword of a sellers' market will prevail is anyone's guess, but it can't last forever before the diminished growth and consumer behavior modifications come into play. My view is that the world is encountering restricted provisions of oil, especially of that which readily comes out of the ground, while larger numbers of people want it, leading to the increased values that we have been seeing. There are qualified, opposing perspectives though, and several days ago, the Christian Science Monitor published an article giving them their due attention.

Those implications aside, the near term bottom line for gas prices only slightly varies from the mantra that I've been reciting since the month of June began: I would lay you excellent odds that they're going up again this coming week. The advances during June have been modest considering the extent to which oil has jacked up, so don't be surprised to see that which you spend for fuel accelerate at a faster pace in July.

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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