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

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 (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 (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 (CVX) and Petrobras (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.

Comments

[Brother Cadfan:]

Let's come out and say it. The investment bankers in Goldman Sachs have no idea about oil production. They are a bunch of overpaid yuppies in their 20s and 30s who wouldn't know a barrel of oil if you threw it over them. The oil patch has been inundated with these people, displacing the wizened old traders who knew the science, engineering and market inside out. Does anyone know exactly what Murti or Currie's qualifications are to talk about oil?

BC

Oct 08 05:33 AM

[Chaser12:]

I disagree. Oil is on it's way up overall and we will not see Oil under 60 bucks again unless something really bad happens. I take the safe route and buy Exxon or Chevron etc...but easy money to be made with these two companies. GS, like it or not, has more influence on oil prices then supply or demand. If they say oil should be at 75 or 85 a barrel you can believe they will make it happen. Happy Trading all

Oct 08 07:26 AM

[prairiedog555:]

Goldman Sachs analysts are not stupid, they along with their superiors are criminals. They conspire to manipulate markets.

Oct 08 07:28 AM

[The Economi...:]

How can you possibly predict this without a turnaround in our dollar?

Oct 08 08:58 AM

[yank:]

Dream on. And one other thing. It is NOT correct what you said about gasoline demand going down. In the past two months gasoline demand has INCREASED considerably over year-ago levels. Hoping for lower oil prices does not make it so. And the USD will continue to head lower.

Oct 08 01:15 PM

[why me:]

History repeats itself, sometimes. At other times it doesn't. Our current economic condition is something new and does not parallel previous downturns including the Great Depression. Oil prices are subject to multiple opposing parameters. I think the predominant factors will result in increased prices.

Oct 08 02:58 PM

[HardwoodFlo...:]

It is pretty scary this idea that we could see an equity run, based on few fundamentals then a turn to EFTs on the "materials" side (e.g. Commodities) that zaps the consumer and then where will we be? Things will undoubtedly get a lot worse. If that is possible.

Talking with a commodities trader last weekend, one who trades on fundamentals, he says the markets have run away from anything he has ever seen. The reality is that outside money can move these markets so fast and so furiously that fundamentals have nothing to do with commodity markets any more- it's all big institutional money jamming electronic trades to make the markets move.

The truth is if your not in the game your out of the game just getting jobbed. All of this is fueled by huge money players- who is paying the ultimate price well we all are..Consumers, taxpayers (bailouts jobless claims etc).

The economy is at it's core (the consumer) very weak and getting weaker as unemployment continues to climb and business continue to fold as a result of a lack of credit support.

It's very discouraging. I love the fact that equities have made a huge run, I'm happy for all those that bought gold but in reality I think this economy is far from sound.

Oct 08 05:12 PM

[HardwoodFlo...:]

It's the old trade from 2008- crank up equities then bid the dollar down and commodities up then short the equities and get ready for a redux. Think that's not possible? I would have to except we've seen it before.

Oct 08 05:14 PM

[Saildog:]

This is article was written by somebody not well acquainted with oil production. All the usual stuff is in their about price, markets and technology; and its all rubbish, since oil production has already peaked. Now the rules are different. With a supply curve that is completely inelastic, price is determined by demand only; and that in turn is driven by economic activity. The oil price and economic activity will settle into a new relationship that will remain tightly bound. As oil production drifts down and absorbs ever more inputs, our economies will shrink accordingly. Of course it will be patchy and variable around the world. Some places with energy resources will do better and others without will do worse. But overall, Business As Usual is finished. Welcome to The Longest Recession.

Oct 08 07:04 PM

[ryanclarke:]

The new production you mention in the deep waters of the Gulf of Mexico must come online very quickly as the production of oil from the shallow waters of the Gulf along Mexico, namely the Cantarell Field, en.wikipedia.org/wiki/..., appears to be in decline. You may be correct in three to five years - but not for the next three to five quarters - as the decline in the value of the dollar will place a great deal of pressure on gasoline imports into the United States. Unless Bernake does something to defend the dollar I predict gasoline prices will inflate along with all other assets - REGARDLESS OF SUPPLY DEMAND FUNDAMENTALS.

Oct 08 11:42 PM

[Petrolandman:]

Nice analysis except the expectation that this year will be an instant replay with prices diving. There is no foundation to that argument. The best explanation to why oil prices will stay strong is that the market has evolved and strengthened in weathering the downturn. Though there is a oil supply surplus, the market is a seller's market. We have Russia and OPEC to thank for that. Regarding natural gas, to me today's price is paradoxical until considering that the same non-traditional players who strengthened prices over the last few years are making a choice to stay in for the long haul and hold the market up through the near term glut.

Oct 09 12:53 PM

[bigbear4511:]

Gasoline use may be up but jet fuel use is down way down and diesel is down even further. The last three weeks has had an upswing in almost 15 million barrels (crude, gasoline, and diesel combined.) To make a barrel of gasoline you need to make a barrel of diesel. Where will you put this excess diesel when storage is already brimming. Refineries are shutting down because the margins are not there. Do you really think this economy can afford 85 dollars a barrel?


On Oct 08 01:15 PM yank wrote:

> Dream on. And one other thing. It is NOT correct what you said about
> gasoline demand going down. In the past two months gasoline demand
> has INCREASED considerably over year-ago levels. Hoping for lower
> oil prices does not make it so. And the USD will continue to head
> lower.

Oct 09 05:00 PM

[bottomdrawer:]

You might want to check out some of this writer's previous articles. Looks as if he is "well acquainted" with oil production and this industry and more informed than others I have read on this site.


On Oct 08 07:04 PM Saildog wrote:

> This is article was written by somebody not well acquainted with
> oil production. All the usual stuff is in their about price, markets
> and technology; and its all rubbish, since oil production has already
> peaked. Now the rules are different. With a supply curve that is
> completely inelastic, price is determined by demand only; and that
> in turn is driven by economic activity. The oil price and economic
> activity will settle into a new relationship that will remain tightly
> bound. As oil production drifts down and absorbs ever more inputs,
> our economies will shrink accordingly. Of course it will be patchy
> and variable around the world. Some places with energy resources
> will do better and others without will do worse. But overall, Business
> As Usual is finished. Welcome to The Longest Recession.

Oct 09 10:29 PM

[pdtor:]

On Oct 08 05:12 PM HardwoodFlooring wrote:

> It is pretty scary this idea that we could see an equity run, based
> on few fundamentals then a turn to EFTs on the "materials" side (e.g.
> Commodities) that zaps the consumer and then where will we be? Things
> will undoubtedly get a lot worse. If that is possible.
>
> Talking with a commodities trader last weekend, one who trades on
> fundamentals, he says the markets have run away from anything he
> has ever seen. The reality is that outside money can move these markets
> so fast and so furiously that fundamentals have nothing to do with
> commodity markets any more- it's all big institutional money jamming
> electronic trades to make the markets move.
>
> The truth is if your not in the game your out of the game just getting
> jobbed. All of this is fueled by huge money players- who is paying
> the ultimate price well we all are..Consumers, taxpayers (bailouts
> jobless claims etc).
>
> The economy is at it's core (the consumer) very weak and getting
> weaker as unemployment continues to climb and business continue to
> fold as a result of a lack of credit support.
>
> It's very discouraging. I love the fact that equities have made a
> huge run, I'm happy for all those that bought gold but in reality
> I think this economy is far from sound.


I fully agree withn you about commodity Manipulation is driving the oil markets. The Too big to fail banks are cleaning up. But lets see how they do when we see second shoe drop in 3-6 months, they will need to raise cash ,see fall 2007 what happened to commodities, they will be much cheaper and wil be demand driven.

Happy Capitalism

Oct 10 09:05 AM

[The Greates...:]

There is no oil shortage, just the ultra rich playing in the oil commodities market and pushing the price up and taking gas and diesel along for the ride. This is also finishing off whatever chance America had for a rebound from the coming Second Great Depression. It is not about supply and demand anymore, rather it is control of supply.

We can all blame Phil Graham with the Commodity Futures Modernization Act passed in 2001. That 262-page bill led to the Enron mess, the sub-prime lending disaster, and opened the door to the “Dark Energy” speculation trading.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...

Also read more about it at this site:
losangeles.injuryboard...

Oct 10 09:59 AM

[bricki:]

Yes there are supply constraints but they are not in play at the current level of economic activity. OPEC has cut production to support prices already and it is difficult to believe they will do it again.

Disclaimer: dumped my oil related stuff two weeks ago.

Oct 10 01:34 PM

[harm38:]

PTR.....China oil is the one for me...

Oct 11 11:53 AM

[William Dav...:]

Why does your graph appear to show only US consumption. 75% of world consumption is out side the USA and nearly all the growth is in Asia.

Can I suggest you use a world consumption graph and a world production graph. You would see that production has been flat since 2005 and therefore increasing demand will cause prices to spike.

Oct 12 05:49 AM

[gabe borens...:]

Last year at this time Global economies were heading for a major decompression.It was logical to assume that the final demand for crude will collapse and it did .This time around U.S economy is heading for a major but noninflationary expansion.The oil prices will likely have some marginal propensity to move down but that is because oil speculators who have contributed to the financial/economic disarray by forcing the crude prices above $140 per barrel,have learned their lesson. Given the current real relative slack in demand,it is difficult to see the crude moving up more than $ 10 dollars per barrel.Relative stability is likely the scenario irrespective of the economic accelerating economic momentum ahead.

Oct 12 05:56 PM

[G. L. Turner:]

It is good to see that the majority of posters here have "finally caught on"...save Saildog and yank...

If you listened to CNBC this AM (Oct 12th) you would have seen how they are "back in the game of being GS and JPM's shills" (including Kilduff) again to promote higher OIL, Gasoline, Diesel and Heating Oil prices....I had to call them and complain...YES, the energy markets are now controlled by a few WS firms...it only takes $9B to control the global price of oil in the markets...That is not much money ofr these firms and a few of their hedge fund clients to poney up and move the market...

Also, I thought the GS' Murti rolled out the "promotional" $150 to $200 prediction in early May of 2008, setting up the push towards the $147 high, a high that stop at that point as a result of the sense that teh rally was over since the golden boys had already slipped moved mid-June with the "big short", a month ahead of their 'sheeple clients' realizing that "something had happened" to the dream...but, we had a shadow culprit - "sub-prime" to point to divert attention. Hmmm.

Oct 12 10:52 PM