Thursday, February 07, 2008
Cheaper oil ahead?
The allegedly smart money is now betting on the price of oil declining:
Flynn, an analyst and vice-president at brokerage firm Alaron Futures & Options in Chicago and a 24-year veteran of the industry, has long been an outspoken oil bull. He was among the first to predict that crude oil prices would top $30 a barrel in 2000 and close in on $40 in 2004. Just a month ago, when oil closed at $96.46 on Nov. 7, Flynn was ecstatic: "This should be a day of celebration!" he said. "High oil prices are a sign of a strong global and U.S. economy. I'm very bullish—scary bullish."
But a lot of scary things have happened in the past month, most notably worries about a spreading credit crunch. Now even Flynn doesn't expect the latest price lift to last. "I'm bearish for the first time in years," says Flynn. "Make no mistake: The trend will be down unless we get a major event to change the outlook. If we get back to the mid-90s, get ready to bail. The sell-off is far from over."
The price of oil may be the best automatic stabilizer that we have. The economy soars and the price of oil increases, imposing an automatic synthetic "tax" that dampens growth. The opposite is also true; the price of oil now falls because the economy is softening, and that will put a lot of money in the hands of American consumers. Oil is already down almost 12% from its peak. If a typical suburban family buys, say, 2000 gallons of gasoline a year, the price savings embedded in a 12% reduction will exceed the silly one-time payment from the stimulus package that passed the Senate today. If oil were to retreat to $60 with concommitant declines in the price of gasoline and heating fuel, the savings for a typical family would dwarf the artificial stimulus in the rebate bill.
7 Comments:
By 
, at
Fri Feb 08, 01:56:00 AM:
Don’t get overly optimistic. HUGO will be HUGE. EXXON has just won a court order to freeze $12 billion of PDVSA assets overseas, in reaction to Hugo’s takeover of an EXXON project in the heavy-oil Orinoco basin last year. PDVSA and Hugo will be very cash short. No more money to stuff into suitcases. In retaliation, Hugo may cut off oil shipments, which will not benefit Venezuela, but will drive up the price of oil. There is no telling what he will do. Hugo has had a very bad two months, beginning with his loss in the Constitutional Referendum. A poll in late December showed just 30% had confidence in Chavez, and 21% had confidence in the government. Not to mention food shortages and the absurd government policies that cause them.
Another way in which this may affect the oil price has to do with refinery capacity in the US. During Katrina, we all found out that there was little slack in refinery capacity in the US. CITGO recently let go 500 contract maintenance workers in late December, so that it could send more cash to Venezuela. While CITGO plans to have its employees pick up the slack, the reality is that some – or a lot- of the maintenance will be deferred. What happens to poorly maintained equipment? Downtime. Loss of refining capacity. Increase in oil price, as there is little slack elsewhere in the US. Moreover, there are few refinery outlets for the sulfur-laden Venezuelan crude.
It is going to get very interesting.
By , at
Fri Feb 08, 08:31:00 AM:
"The trend will be down unless we get a major event to change the outlook."
He seems to be saying that prices will go down until they go up again. That's some useful information right there.
By 
Charlottesvillain, at
Fri Feb 08, 09:29:00 AM:
I haven't done a regression or anything but I have been surprised at the relative lack of correlation between prices at the pump (at least in central VA) and the price of a barrel of oil. As oil soared I was suprised to see that gas prices remained fairly stable. I imagine they will show a similar stickiness on the downside as the price of oil declines.
Meanwhile, today there was a report that producers now think they can defend $80 oil. Seems likely to me.
By , at
Fri Feb 08, 11:48:00 AM:
The actual US gas consumption is around 400 million gallons/day, or under 4 gals/ household per day or 1500 gals/year. And that includes all gasoline, including that used for commercial and government vehicle fleets, so the actual family consumption is even less. I dunno about your family, but we don't buy anywhere near 40 gals/week.
However, if you count in the cost of heating fuel, electricity and the hidden fuel cost in everything we buy, they impact is even greater than if we really were buying 2000 gals/year of gas per family.
By TigerHawk, at
Fri Feb 08, 12:16:00 PM:
Anonymous, I appreciate your point and you are no doubt correct. It does very much depend on your household and such. My technique is to look at the odometers on the cars we drive, divide by the number of years we have owned them for an average mileage per year, and divide that number by my gas mileage estimate for the vehicle in question. Doing that, we burn between 1500 and 2000 gallons a year in our four cars (even though my commute is only around 6 miles). Of course, we are a suburban family with a lot of drivers (3-4, depending on how you count). If you are a DINK couple in Manhattan you do not even own a car, so your direct consumption (even throwing in your share of cab rides) is a miniscule fraction of the typical suburban average.
By , at
Fri Feb 08, 01:37:00 PM:
The price of oil is 5X higher than it was in the last recession (2001-02). Thus, it is not an 'adjustor' to the extent Tigerhawk states.
That being said, this recession could cause permanent change in oil consumption patterns, for the better. Fuel-efficient cars will become permanent parts of mainstream car usage.
By , at
Sat Feb 09, 12:41:00 AM:
been reading REMINICE they show the old prices including the price for gas at like 21 cents or 35 cents
