Oil futures: I don't think they reflect the rumor of $3/gallon this summer

[Alpharetta]

Shouldn't oil futures reflect a shortage?

April gasoline futures closed at $1.14/gallon today. August futures are at $1.04/gallon.

http://quotes.tradingcharts.com/futures/quotes/HU.html

This just doesn't look like serious consideration is given to any of the various reasons for a shortage, such as those given in this article:

http://www.ajc.com/business/content/business/ap/ap_story.html/Financial/AP.V4897.AP-Commodities.html

Bottom line: I'm not counting on economic chaos this summer.

[rapier]

1. notes

WHen nearby months of furtures contracts are higher than ones futher in the future it is called backwadation. A funny term that says the situation is backwards. While all commodites have a seasonal aspect the normal thing is for the nearby contract to be lower than the further out one because of the cost of storage, interest etc.

Backwadation generally can be interpreted as indicative of high speculative activity. Speculators usually play the nearby or 'front' month contract. As the article says, there are a lot of 'longs', ie. buyers in the market. Of course for every long there is a short but in the parlance of futures this means that there are a lot of people speculating on the long side.

All that said, it is fair to say I think that 'the market' does not anticipate higher gas or oil prices later in the year. just like they didn't last year.

Oil and gasoline and natural gas inventories for that matter are very very tight. It is in fact a wonder that prices are so low. In my probably crackpot opinion there is a tremendous amount of effort being made by the industry itself and the worlds really big money to keep prices low till the election.

Into the puzzle one must also put the dollar, which appears to have made some sort of important low. This will probably tend to keep oil prices in check.

Unless there is a new worldwide recession the long term trend for oil is up. Adding to my political paranoia veiw I would expect gas and oil prices to stay around this area on average till the election. After that we wiil rise to a new higher plateau. (That prediction should not be taken to seiously. It's just my feeling at the moment, and subject to change.

[Alpharetta]

2. thanks for your insight

I think we are on about the same page.

Would you agree Bush's cohorts the oil companies have the ability to raise gas prices but they are not the only ones?

As distributors, they certainly could create a shortage a la the Enron California fraud in order to create panic and profit.

But they're unlikely to do that this summer and risk damaging this administration's re-election chances, right?

==

The x factor for this summer could be the supplier nations. I see them calling for cutbacks in production. Do you think they have the discipline to do it drastically this summer? Do you think they are motivated to damage Bush's economy?

[stevebreeze]

3. excuse my ignorance but.....

are these wholesale prices? Even so it seem like $1.14 is very very unlikely in April. It is also unlikely we will have a big decline in the price of gas as price per barrel is over $33 last I heard. This is historical rather high and unlikely to decline much as some of the run up is tied to the 10% drop in the dollars value relative to most foreign currency's. I would be surprised if Bushco did not try to suppress prices (my guess is an opening of the strategic oil reserve spigot) but it is unlikely to fall much below $1.50

:kick:

[Alpharetta]

4. pre-distribution

Since no experts chimed in, I'll take a guess.

No $1.14 is not even the wholesale price. I think wholesale means the price retailers pay for delivered gasoline. Wholesale is around $.20/gal less than the price at the pump.

Pretty sure $1.14/gal is the right to pay that price to get the gas from the refiner. So add the cost of distribution plus retail markup.

[Alpharetta]

5. good question about the strategic oil reserve

I wonder how quickly the administration could cause prices to drop if they wanted to stop hoarding for a while.

Sounds like a quick way to juice up the economy.

[happyslug]

6. Price at pump also includes TAXES

Which goes from 7.5 Cents a gallon in Georgia to 31 Cents a Gallon in Wisconsin.

Also remember their is 42 gallon to a Barrel of Oil. Most prices are stated in terms of Barrels not Gallons.

While all gasoline/Diesel fuel gets to your local gas station by tanker truck. The tanker truck gets its fuel from a local distribution center. The issue is HOW does the distribution center gets its fuel? The cheapest way to get fuel to the distribution center is by tanker ship, barge or pipeline. If the fuel has to be trucked in costs increase tremendously. For example most fuel for the Mid-West goes by barge up the Mississippi River. As to go east from the Mississippi the price of gasoline slowly raises as the cost to ship the fuel by barge on the Ohio goes up.


For list of Taxes by State:

http://www.lmoga.com/taxrates.htm

[happyslug]

7. I forgot to mention the 18.4 FEDERAL GASOLINE TAX

This is also added to the price of Gasoline at the pump.

Lets look at this, someone here mentioned he/she paid $2.10 a gallon for gasoline in California. California has an 18 cents a gallon tax. Added that to the 18.4 cents a gallon Federal Tax, 36.4 cents of that $2.10 is TAXES not imposed on Gasoline till the pump.

Thus at $2.10 a gallon, the the non-tax part of price of Gasoline is $1.736 a gallon. Distribution costs runs about 20 Cents a Gallon so wholesale price should be about $1.53 cents a gallon.

Furthermore the price being quoted is the price in New York Harbor. From that point it must be shipped to a local distribution point. Costs is again about 20-30 cents a gallon. Given the above I do not see any indications that people think gasoline prices will drop this summer.

Remember when oil reached $34 dollars a barrel in January 2003, that meant each oil producer was earning only 80 cents per gallon ($34 dollars divided by 42 gallons in a barrel).

Remember this is the price for CRUDE OIL, not refined gasoline. The price of Oil is back to 34 a gallon this year thus the base is again 80 cents per gallon.

Thus out of the $2.10 you pay, 36 cents go to the state and Federal government for Taxes, OPEC gts 80 cents (total $1.16). The remaining 94 cents pays for refining and distributing the oil. This is where any profits exists.

One last comment, my home state of Pennsylvania has a state gasoline tax of 25.4 cents a gallon, so my total gasoline tax paid at the pump is 44.5 cents a gallon. Prices locally is $1.65 a gallon. Taxes and OPEC well head price total $124.5 per gallon. This leaving 40.5 cents to cover costs of distributing and refinning. More urban areas pay less (Pittsburgh the cost tend to be $1.59 a gallon) but Pittsburgh is also closer to the main distibution point along the Rivers (Pittsburgh's gasoline is shipped by Barge up the Misissippi River to the Ohio River and than to the Mongahela river). The further you are from the Mongahelia the higher is your cost for gasoline (until you cross the Mountains and you end up in the Philadelphia distribution system).

Remember barge shipments is cheap, and the difference in price between California and Pennsylvania may reflect the cost of shipping gasoline by Truck in California (with some additional cost caused by anti-pollution formulated gasoline, but compared to cost to ship these are minor costs).

[Alpharetta]

8. my point was: the options have not trended up enough to indicate shortage

Predictions of $3/gal. are not indicated by the options price.

[rapier]

9. notes

$3 a gallon is a silly prediction. I say that BECAUSE the markets are not seeing any tigher supplies going forward. That doesn't mean the marekt can't be wrong, it can be. It is just that there is no raionaal way to predict such a thing. The prediction is a total flyer.

Gasoline prices are not totally contigent upon oil supplies. Gasoline prices react to local conditions. The most important one being the local refinery output.

Gasoline markets are always oligopolistic. Few refiners exist in any area. It is my contention that since 2001 the refiners have been very diciplined in maintaining maximum production, on average, nationwide. How do they do this. Mostly by keeping maintainence shutdowns to a minimum and keeping the plants up and running as much as possible. I don't mean they are slacking on maintainence, it is just that they are striving to keep shutdowns to a minimum. Something which is in fact agaisnt their best interests.

Remember, they are oligopoly. In the California electricity crunch the generators famously kept plants off line as much as possible. They even sometimes announced shutdowns when they were in fact running, so as to keep the bidding hot. The same strategy could apply in gasoline, but hasn't.

Summer traditionally sees the most refinery maintenence and is the most commmon time for local spot shortages and price spikes. Those did occur in 02 and 03. Let's see if they do in 04. I'd bet a beer that this summers spikes will be below normal. Again I say, so as to keep the political pressure off Bush, and themselves.

Still, oil supplies are out of their hands. If something big were to happen in Saudi Arabia or elsewhere in the Mid East oil prices could spike and then there is nothing the oil companies and refiners could do. (While the major oil companies represent the majority of refiners there are other companies that just strictly refine, like Diamond Shamrock and in the end they are dependent upon the oil price, like everyone else.)

California traditionally is a tight gasoline market for reasons of geography. Gas is high priced there too because of taxes, environmental issues impacting the refiners, more difficult formulations which again have to do with regulation and of course the gigantic demand.


Year after year American oil and refinery inventories have been falling. This is partly due to modern bussiness practice which seeks to reduce inventory so as to reduce cost. the funny thing is that this reduction in inventories should lead to more spot shortages and price spikes. It hasn't. Form your own theory as to why.

Worldwide inventories have followed the same path lower. Chineese demand is soaring which is putting an ever tighter choke hold on builing inventories. Inevitably there is going to be some kind of problem which will spike oil and gasoline to the moon. Only a significant worldwide economic slowdown would push that day off.

[happyslug]

10. My point is the COST independent of the Well head price

In Pennsylvania that appears to be 40.5 cents per gallon (1.65 a gallon less 80 Cents production Costs at $34 a gallon, and 44.5 Cents Taxes)
In California that costs appears to be 94 cents per gallon (2.10 less 80 Cents prduction costs less 36 cents taxes).

Thus for California to jump to $3.00 a gallon is not that large a jump. In Pennsylvania the jump will be larger but till doable.