World Series of Crude Oil: Winner Decides Winter Gasoline Prices

The two teams for the upcoming World Series of crude oil have been decided. The first team is made up of speculators and hedge fund advisors with the other team made up of the major and independent oil companies. The final outcome of this game between the Wall Street Titans and the Texas Oil Barons will decide the winner or loser, in this case the gasoline customer.

The big hedge-fund managers and other large speculators make up the Wall Street Titans and are betting on that the outcome will be that the price of crude oil price will increase to $85 a barrel by the end of this year. They have already increased their net-long position in New York crude-oil futures last week, according to Commodity Futures Trading Commission (CFTC).

Net long positions are bets that prices will rise and outnumbered short positions by 74,383 contracts on the New York Mercantile Exchange (NYMEX), an 8% increase over the week before. Crude oil is hovering around the $80 a barrel mark as of today.

That confirms the Goldman Sachs (GS) game plan, to drive up the price of crude oil from to $85 a barrel by year end, and it is working. Their analysts are circulating any story and article boosting the use of crude oil in economies doing better than ours such as India and China.

The Nigerian rebels blew up some oil installations in the Delta region of that country in the last two weeks. It temporarily cut back shipments of the much in demand light crude oil to the U.S. in the last two weeks.

Those are the heavy hitters for the Titans and when they are up to bat the opposition seemed to shrink away from making defensive moves. The only thing they can do is put our best pitcher into the game and hope that they can finesse them into striking out.

In this case the really heavy hitters are Goldman Sachs and Morgan Stanley (MS) with their advisors telling big money investors to use crude oil as a hedge against inflation. Meanwhile the oil companies are trying to keep their refineries running and hopefully make a profit.

Who will you be betting on this time? Goldman Sachs almost drove the price up to their predicted level of $150 a barrel in July 2008. The economy and realization that demand of fuel had been going down was due to the price of gasoline spiking up to $4.50 and diesel at $5 per gallon. It exceeded what customers were willing to pay.

On the other side are the Texas Oil Barons and they are hoping that the Titans will not succeed again this time. They are convinced that the Titans picked the wrong time of the year to start talking up the price of crude oil.

U.S. crude oil inventories, already as historic high level, will increase even more because oil companies are shutting down or cutting back production at their refineries. This in preparation for the usual year end reduction in inventories for both crude oil and fuel inventories. The major oil companies use the Last In/First Out accounting method and need to do this each year in order to reduce paying corporate income taxes.

On top of that the oil refineries have now switched to producing the winter grade gasoline for which they get about 10% more gasoline out of a barrel of crude than the summer grade. Added to that is the upcoming switch from 5.7% to 10% blend of gasohol. Currently corn alcohol used to blend with gasoline base stocks to make gasohol is selling at about 50 cents per gallon less than the base stock.

My call is that the oil companies will need to pitch a perfect game to win one for the Gipper.

Disclosure: The writes has no investment in any equities or commodities.

Comments

[ryanclarke:]

The author wrote, "U.S. crude oil inventories, already as historic high level, will increase even more because oil companies are shutting down or cutting back production at their refineries. This in preparation for the usual year end reduction in inventories for both crude oil and fuel inventories." I disagree with your statement ... in particular, the last sentence. Based on previous years, or "typically," one should say oil stocks are drawn down in the Oct-Nov-Dec time frame while gasoline stocks are RAMPED UP in the Oct-Nov-Dec time frame. Please refer to the weekly petroleum status report .pdf file listed at the EIA site here , www.eia.doe.gov/oil_ga... . FIGURES 3 and FIGURES 4 confirm my statement and disagreement with the author's wording.

Oct 27 02:13 PM

[William Dav...:]

"The economy and realization that demand of fuel had been going down was due to the price of gasoline spiking up to $4.50 and diesel at $5 per gallon. It exceeded what customers were willing to pay."

Well you will get use to $5, $6 and even $7, we have in Europe a long time ago. As there are no really good alternatives.

Oct 27 09:08 PM

[Canuck Econ...:]

William Dav said:

"you will get use to $5, $6 and even $7, we have in Europe a long time ago. As there are no really good alternatives"

True we would get used to it - IF this was driven by the taxation wedge, as it has been in Europe. However, if this is driven by supply an demand, we will then have the supply and demand responses that we have observed - witness the huge investments in Canadian Oilsands and the humongous response in carbuying patterns for which the American car industry was so disastrously prepared for. The transition costs of a fast adjustment are huge! The economy will just fall apart, and we have had but a little taste of it in the past year. Sustained high oil prices will engender sustained or worsening economic slowdown.

Regarding the article itself, not sure that I see Goldman Sachs is actually manipulating prices towards $100/bbl, much less succeeding in doing that.

The supposition here is that the company can manipulate public opinion and that will impact the market for oil for a month or two. Hardly believable! The crude oil market cannot be manipulated by Goldman or the "texan oil barons" for more than a few days; only some very select middle-eastern producer countries are able to keep the market under-supplied for a time (but why should they collaborate with Goldman, when they might be better to bet against them - and their big ugly bonuses).

The question is can world economies stand oil prices greater than about $70bbl? I think not. Middle-eastern countries with influence in OPEC have already signaled that they do not believe this and will aim to keep prices $30 lower than the $100/bbl advocated by the author. Current prices will come down!

Oct 27 09:59 PM

[Ron2008:]

Looking at the new DCOT report, the Manged Money net long percentage of total open interest is at its' highest level for the the entire 3+ years of data given to us by the CFTC. Even higher than it was in 2008.

In the last 3 weeks the Managed Money group has gone from 60,002 net long to 130,712 net long in crude oil. And not surprisingly, the price went from 66.71 to 79.09 on the day of the reports.

Managed Money is clearly driving prices.

The Manged Money group also added a huge 21,605 net longs last week in Unleaded Gasoline. Highly unusual for this time of the year.

What is the Goldman and JPMorgan game plan? Looks like going long right now. But that doesn't make sense to me. There are very few fundamentals to back up this latest rise. They are on their own.

Oct 27 11:15 PM

[JohnDough454:]

bit of nonsense:

"Oct-Nov-Dec time frame while gasoline stocks are RAMPED UP in the Oct-Nov-Dec time frame."

In the real world of refining, gasoline stocks build in winter because refiners run to heating oil (diesel) demand) and gasoline overproduction is stocked for spring shutdowns. A refinery is not some magic black box that produces whatever you want in any ratio. There are limits to how much production can be shifted from max gasoline mode to max mid distillate mode.

The year end inventory game is also overblown. They de-stock to 12/31 and then buy it back in Jan to get to comfortable operating levels. No real net change in stocks.

Oct 28 02:39 AM

[Alamo:]

The author's premise as well as the commentary by the responders all offer further rationale for effectively ending our dependency on crude oil refined products, gasoline and diesel, which the average American has little, if any, control over. "Any" control is reduced to paying for or not paying for the posted pump price. Fat choice that situation represents---either pay or park!

On the other hand there's the real possibility that utilizing our abundant natural gas reserves in the transportation sector could provide a measure of control through "demand" constraints. At the very least, transportation expenditures ought to be reduced in that scenario due to the complete disconnect in the equivalent heat value of the fuels: 8 gallons of gas or diesel at about $3.60 per gallon ($28.80) versus the current cost of a mcf of natural gas at $4.75. (I am aware that the gas and diesel price quoted are retail prices and the natural gas price is the comodity cost, but it illustrates an extreme unbalanced phenomenon in the two energy sources).

More demand---almost any additional demand can be expected to increase natural gas prices, but regardless it can double in cost and still be far cheaper than foreign sourced---and foreign priced crude. Include the adverse health and environmental aspects, the cost of keeping the Straits of Hormuz open, the Somalian pirates off the tankers and the shaky excuse of a democracy in Iraq and the cost of crude clearly becomes prohibitively expensive. Good for a bunch of terrorist-supporting sheiks and their Wall Street manipulating Buddies, but not so good for the average American driver and tax payer. Somewhere in this equation he ought to be considered.

Oct 28 11:23 AM

[Jack Walker:]

Bob,

Some of the major oil companies, such as BP, also have trading operations. How do we know they are not complicit and participating with Goldman and Morgan on the long side regardless of the supply and demand fundamentals?

If so, it makes one wonder what the CFTC and Department of Energy are doing.

Jack

Oct 28 01:53 PM

[Bob van der...:]

Oct 28 01:53 PM Jack Walker wrote:

> Some of the major oil companies, such as BP, also have trading operations.
> How do we know they are not complicit and participating with Goldman
> and Morgan on the long side regardless of the supply and demand fundamentals?

Jack:

In August 2009 Oklahoma State Attorney General Drew Edmondson filed a lawsuit against BP/Arco (BP). He is accusing them of gaming the price of gasoline and crude oil since 2002. This alleged scheme had previously been brought to the attention of the Federal Trade Commission but Edmondson claims to have found fresh evidence that BP was able to manipulate gas prices by hoarding short-term motor fuel and crude oil supplies.

Bob van der Valk

Nov 03 11:06 PM