World Series of Crude Oil: Winner Decides Winter Gasoline Prices

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Includes: CME, DBO, GS, MS, NMX, OIL, USO
by: Bob van der Valk

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 (NYSE: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 (NYSE: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.