Stock Picks for Under-a-Buck a Gallon Gas

When I started driving, gasoline still contained lead, and regular was selling for 29 cents a gallon. My father remembers 10 cents a gallon.

While it’s highly unlikely we’ll ever see those prices again, you could see gasoline below a $1.00 a gallon, and it just might hit $0.75 a gallon. And while it won’t be in time for Christmas, the Easter Bunny might leave it in your Easter Basket.

And it’s not just wishful thinking on my part: the International Energy Agency’s (IEA) most recent monthly forecast (released Monday) indicates year-over-year oil demand will shrink in 2008 for the first time in the last 25 years.

Why? Developed nations are skidding into recession and emerging nations have hit the brake petal on economic growth. And when the U.S. – by far the largest oil user in the world -- cuts back, the ripple effect is devastating to producers.

Oil-laden tankers are backed up at U.S. oil unloading terminals, waiting to unload. At the same time, the nation’s most recent oil inventory report shows storage tanks here are brimming with oil, gasoline and heating oil.

And while OPEC is scrambling to cut production, chances are good that they won’t cut far enough or fast enough. Supply destruction will continue to lag demand destruction for the foreseeable future. And that sets the stage for a continued softening of pump prices as well as heating oil.

And then of course, there will be the cheaters: you can expect rogues like Venezuela and Iran to continue to pump and sell as much oil as they can possibly suck out of the ground, since there is little production accounting oversight on the part of OPEC. It was a big problem the last time we had an oil crisis back in the 1970s.

How low could it go? Merrill Lynch is on record predicting $25 a barrel. It has a fairly good chance to go even lower, before supply cuts catch up with global demand slowdown, which is still occurring.

How long will it stay low? It’s hard to say, but any increase in global economic growth would provide a boost in demand and a subsequent rise in the price of oil. Current economic forecasts, while mixed, don’t show much of an increase until the latter half of 2009 or even early 2010.

For now, though, demand is still falling, with October alone registering a steep 8.3% decline in crude prices. Simple math says that if crude prices are cut in half from here, so too could the price at the pump, which would have car dealers with rows of gas guzzling SUVs on their lots jumping for joy.

But just like $147 a barrel was artificially high, so too would be $20 a barrel on the low side. As prices begin to stabilize in late 2009 or early 2010, oil will likely return to a trading range of $80-100 a barrel, and begin to slowly rise from there as the global economy climbs out of recession, and economic growth rekindles.

Naturally, there are a few ways to put your growing mound of gas-savings cash to work: shares of Autonation, Inc. (NYSE:AN) one of the largest car dealer networks in the country, are off 50% from their 52-week highs. Any sustained reduction in the price of gasoline will likely have a positive impact on car sales, particularly in the hard-to-move segments of the market, like low-mileage SUVs, vans and pick-ups.

A more direct way to play this would be to nibble on a few shares of Valero Energy Corp. (NYSE:VLO) that’s been bouncing along in a tight trading range of $15-20 a share since mid-October. Its profits are tied directly to the spread between the price of crude and the price of refined products (known as the crack spread). A widening spread bodes well for refiners like Valero.

While I’m not sure I’d be running out to buy a big SUV, it’s certainly is easier on the wallet when pulling up to the pump. But just don’t get too comfortable with cheap gasoline. Prices will eventually revert to their natural mean, and in the case of oil, it will eventually be higher.

Disclosure: no positions

Comments

[Bob van der...:]

So what happened to analysts’ predictions that crude oil would be $200 per barrel by the end of this year? Goldman-Sachs and Morgan Stanley have already taken that number down it down a notch or two. They are now forecasting crude oil to go back to a $75 per barrel average for 2009 with the average for 2008 coming in at around $100 per barrel.

The "true cost" of crude oil is determined by how much effort has to be put into getting it out of the ground. Each of the oil production companies have come up with methods to value their proven reserves. Sir John Browne, BP's former CEO, said that their figure was about $30 per barrel for new deep well crude oil production in the Gulf of Mexico in an interview for "60 Minutes" just before resigning his chairmanship about two years ago.

The price of crude oil will eventually be determined by market conditions. The world in general, and the US in particular, is now learning to consume less oil on a daily basis, even though the global economy can be expected to continue consuming fossil fuels for many decades to come.

There are only three ways to reduce oil consumption:

Ø Improved fuel efficiency and conservation
Ø Introduction of substitute energy technology
Ø Economic contraction

It now looks like we are now heading that way on all three fronts. $1 per gallon gasoline would equate to $10 per barrel market value for crude oil. Refineries would have to shut down and new oil drilliing come to a halt before that happens. I don't think so!

Bob van der Valk is a petroleum industry and fuel-pricing analyst residing in Issaquah, Washington

2008 Dec 17 06:28 AM

[Bob van der...:]

The $1 per gallon gasoline scenario is highly unlikely since that would equate to $10 per barrrel market value for crude oil. Refineries and oil well would have to be shut down before that happens.

So what happened to analysts’ predictions that crude oil would be $200 per barrel by the end of this year? Goldman-Sachs and Morgan Stanley have already taken that number down it down a notch or two. They are now forecasting crude oil to go back to a $75 per barrel average for 2009 with the average for 2008 coming in at around $100 per barrel.

The "true cost" of crude oil is determined by how much effort has to be put into getting it out of the ground. Each of the oil production companies have come up with methods to value their proven reserves. Sir John Browne, BP's former CEO, said that their figure was about $30 per barrel for deep well crude oil production in the Gulf of Mexico in an interview for "60 Minutes" just before resigning his chairmanship about two years ago.

The price of crude oil will eventually be determined by market conditions. The world in general, and the US in particular, is now learning to consume less oil on a daily basis, even though the global economy can be expected to continue consuming fossil fuels for many decades to come.

There are only three ways to reduce oil consumption:

Ø Improved fuel efficiency and conservation
Ø Introduction of substitute energy technology
Ø Economic contraction

It now looks like we are now heading that way on all three fronts.

Bob van der Valk is a petroleum industry and fuel-pricing analyst residing in Issaquah, Washington

2008 Dec 17 06:30 AM

[sstro:]

I'm going to use my traffic indicator as to why gas prices will not stay this low very long. When gas got to almost 5 bucks a gallon here in Southern California folks were scrambling to use public transportation or other means to get around so it took me 1/2 hour to get to work. Now I'm back to my almost 1 1/2 hour commute of 26 miles. I will bet that this has taken place across the country in bigger metro areas. So I will say we'll see a national avg. of 3 bucks before we see less then a dollar. But who really knows my crystal ball has a fog problem that I can't control.

2008 Dec 17 08:22 AM

[Chris B:]

I sold out of DTO much too soon on the way down. Now I'm fighting the urge to get into DXO for the ride back up. Just... a... little... lower....

It's inevitable that some of these Wall Street banks, now able to borrow money at 0%, will be looking at dabbling in oil futures again too.

2008 Dec 17 09:16 AM

[eugene holman:]

from what i understand 1000cu.ft.of natural gas=8 gal.of gasoline.(btu) if gas sells for1.75/gal and natural gas sells for 5/1000 cu. ft,,natural gas is about 1/3 the cost and it's here in the US.am i right?

Jan 27 12:53 PM