Crude Oil and Gasoline Prices: Like Déjà Vu All Over Again

Includes: BP, CVX, OIL, PBR, USO
by: Bob van der Valk
Dateline: Terry, Montana
October 7, 2009 2:45 PM MDT
It’s that time of the year again to watch the boys of October get out their big bats and hit for the fences. “You can observe a lot by watching” is one of Yogi Berra’s favorite quotes and is applicable to what is happening with crude and gasoline prices today.
October is a crucial month to watch the petroleum industry as well. Refineries in the U.S. and Canada are busy switching over from summer grade to winter grade gasoline as well as increasing their heating oil production for the upcoming winter.
This year will be an instant replay of this time last year with the price of crude oil and gasoline going down hard. Gasoline prices will lead the way once again with crude oil prices to follow. The chart below was prepared by James L. Williams with WTRG Economics and shows the correlation between demand and price.
click to enlarge
Who can forget the forecast in August 2008 when Goldman Sachs (NYSE:GS) equity analyst Arjun Murti predicted that crude oil prices would spike to $150-$200 per barrel before the end of 2009 due to the increase in demand and shortage of supply?
Once on that treadmill, it was difficult for them get out off it without major losses to their investors, and therefore had to keep talking crude oil prices up further to cover their exposure.
Eventually their commodities team led by Jeffrey Currie adjusted that price down to just $45 per barrel for 2009. That was after the effects of the financial crisis in September 2008 caused crude oil speculators to wake up to real world reality and panic selling took its toll from the deep pocket investors.
When investors asked why are oil prices going up, the GS response was “because there is a shortage” – and when they asked why they thought there was a shortage, the response from GS was “because the price is rising”. What are you going to tell those investors when it goes in reverse of what your predicted?
In fact overall consumption of crude oil has been a downward slide tracking the current recession as well as resistance by the public to the skyrocketing price of gasoline.
The real world price is related to the actual cost of producing crude oil using available technology. That was $40 per barrel in November 2006 when Sir John Browne, the CEO by British Petroleum (NYSE:BP), was interviewed for 60 Minutes segment just months before a sex scandal forced him to resign. In the lengthy interview he divulged his company’s extensive exploration and production program and their commitment to find crude oil wherever it was economically feasible.
Lord Browne was referring to then what has now been brought with partners Chevron (NYSE:CVX) and Petrobras (NYSE:PBR) in as a successful discovery of crude oil in the deep waters in the Gulf of Mexico. The Tiber oil field, which is 7 miles deep, ranks among the largest petroleum discoveries in the United States. It has the potential of producing half as much crude in a day as the Alaskan North Slope.
U.S. crude oil prices averaged $32.36 a barrel from January 1973 through June 2009 with the world oil price averaging $35.50 a barrel during that same time. The median oil price for that period was $30.04 a barrel. A jump to $40 a barrel would not be far a stretch.
Like in baseball, we are back to the basics in the petroleum markets. Baseball is a great game, and almost every kid has at one point played baseball. One of the fundamentals in baseball is throwing the ball for distance, strength, and accuracy.
The same analogy is applicable to forecasting crude oil and gasoline prices - practice, practice, practice.