Tag: profit

The 2008 Driving Season Begins. What’s in store?

The long awaited 2008 Summer Driving season is now upon us, after a mostly gloomy and cool Memorial Day weekend here in Mid-Michigan. With gasoline prices approaching and surpassing $4, many are asking what’s in store for this Summer… what can I expect, when should I vacation?

This post may be one of my longer posts. Just sit back and read it, you may find some information you didn’t know. I’ll try to cover everything that’s on my mind at this point.

First glance this morning the market was up… but now we’re seeing a good size pullback in the oil and gasoline markets, with crude falling over $3bbl at this writing. Why? I’ll explain.

If you haven’t noticed, we’ve had a significant run-up in prices this past Spring. I suspect the main reasons were the weaker U.S. dollar, higher global demand, and speculation. It’s anyone’s guess what percentage each one of those played in the higher prices, but I’m sure there are a couple factors that I haven’t included that have helped push prices up as well.

$4.19 was the price this weekend if you hadn’t noticed, and many are wondering if this is the highest we’ll see this year. It’d be easy for me to say yes based on past years. In 2006 and 2007 prices for the year peaked in mid-to-late May. However, this year hasn’t been anywhere close to resembling ’06 and ’07. In those years prices climbed more due to actual issues and problems- refinery maintenance, etc. This year, we’ve really not had as much bad news, but the economy has been more the indicator. The worse the economy seems to get, the more oil and gasoline prices rise. You’d think the two would be hand-in-hand, but that’s not the case.

I’m *thinking* that now we’re in driving season, we may see traders pull out as they realize we’re sitting on record high oil prices without a real reason. Supply is remaining constant, Saudi Arabia says they’ll try to pump more oil, and we haven’t really had any refinery issues. Is it time for the market to go back to realizing the fundamentals instead of buying based on speculation?

Refineries have and are in the midst of a huge number of expansions and upgrades. Many older refineries are adding and replacing older equipment that isn’t as efficient. They’re tightening their belts [refineries] to get every penny out of every gallon of gasoline. Since oil companies have been enjoying record profits, they’ve also been spending billions on refinery expansions. Shell is well underway to renovate an existing refinery to near DOUBLE its output. While we won’t see it online for the next couple years, the market should be looking down the road and realizing that output will grow as record profits continue.

Let’s not forget about the Goldman Sachs analysts, Murti and Currie- they’ve predicted record territory for oil the last few years and have been amazingly accurate. Just a week or so ago, they raised their forecast to say the average price of oil in 2008 would be $141 and oil have a “super spike” to $150-$200/bbl. The day they released that forecast, oil prices took a sharp jump, and have continued their climb… not because of OPEC lowering output, or because a refinery shut, but because two men predicted higher oil prices. This is where I’m talking about a return to fundamentals instead of speculation! Anyway, these two men forecasted in 2005 that oil prices would rise to $50-$105 over six to 24 months and were pretty accurate. They then boosted their forecast to $80-$135 in September 2007, even during a seemingly non-existent hurricane season. Still, they re-raised themselves last December, and just weeks ago re-raised again. Just keep in mind WHY Goldman analysts may be doing this… that is, making seemingly high forecasts. They are in the business of selling oil, I consider them an oil broker. They run huge commodity funds, give advice, and trade oil. Wouldn’t you think that to be a HUGE conflict of interest? Almost like going against the Terms of Service of eBay and bidding up your own online auction.

The interesting part of this is that while Goldman analysts have raised their own forecasts, which would provide HUGE profit to oil companies (ExxonMobil, BP, Shell, etc), Goldman has NOT raised their stock outlook for these companies, and they’ve kept their rating on ExxonMobil at “neutral”. Would one think that Goldman might put its money where its mouth is and raise their outlook on these oil companies stocks? Quite interesting. Perhaps Goldman knows that while they enjoy making tons of money off trading oil, one day the bubble will pop. I can’t think of any other reason why Goldman would not raise their outlook on XOM stock [ExxonMobil].

Point here is that this latest rally is pretty much only supported by Goldman, which is like the oil trading god. Perhaps Goldman has been the one fueling the latest rises, buying more oil to push prices up so its analysts are correct. Nothing like using fear to make a profit, which may be what they’re trying to do.

Back to my office chair- I stare at the $3.98’s and $4.19’s that are out in the Midwest.

I’d love to predict lower prices, but the way I see it, any prediction I make will have odds that are worse than buying a Big Game lottery ticket.

However, I’ll do it anyway, and maybe the odds will be much better than a Big Game ticket, but still, I wouldn’t put more than a $20 bet on it.

Summer 2008 outlook:
Gasoline:
Late May prices peak to $4+, slowly decline into early-to-mid June, perhaps as low as $3. Early July will have much of the same, people will be rejoicing when prices come under $3, but that doesn’t look entirely realistic as hurricane season approaches. Traders will begin focusing on any hurricane that develops, and starting in mid-August, we’ll see prices fluctuate quite a bit. If any Category 3 or higher hurricane strikes West of the Mississippi in the Gulf, expect gasoline to jump right back to Spring highs or even higher. If the 2008 hurricane season is a non-event, expect market fundamentals to kick in and we may see a large correction in gasoline prices. I think that with demand slowing late Summer and oil prices due to come back down,
it will boost crack profit, which will entice refiners to make
utilization rates climb all summer leading to a potential collapse in
prices this fall/winter- perhaps as low as $2.50 starting in October and lasting through mid-November.

Diesel:
Prices won’t really pause much as global supplies remain well-below average. Prices may flirt with $5 in the Midwest while nationwide prices rise to near $4.75. Don’t expect high diesel prices to cause a huge demand slowdown, especially with farmers raking in profits growing their fields, feeding their equipment. The U.S. has been exporting a lot of diesel to Europe as well, so our own stockpiles aren’t as cushy as possible. Diesel may fall back to $4.35 as the summer continues, but it won’t last long. Expect diesel to rise substantially if hurricane season is active.

The huge wildcard will continue to be the 2008 Hurricane Season. If it’s more active than usual, be prepared to cancel vacations. If not, it may help push prices lower come late Summer and early Fall.

Obviously things can and will change rapidly, but Ed and I will continue to monitor prices throughout the Summer. We will both need some time off and may miss a prediction here and there, but overall TheGasGame.com will continue to be active!

Patrick

Diesel to approach $4.50 a gallon

Unbelievable turn of events for diesel and heating oil today.

While I noticed yesterday that heating oil prices were up nearly double they should be, I read that diesel is what is currently driving refiners to refine more fuels.

Right now, the profit for refining oil into heating oil/diesel is way more than the profit for gasoline. Overall, the crack spread, or profit of refining one barrel of oil is $13.18, thanks largely to the 40 cent premium heating oil is over gasoline.

Part of this run-up in heating oil may be largely due to the fact that the U.S. Northeast will be colder than average for at least two more weeks into April, putting more strain on truckers who also rely on the diesel fuel, which is also used for heating oil.

Unfortunately this means truckers can expect to pay at least 20 cents more per gallon in the coming days, with prices in Grand Rapids for diesel approaching $4.50/gallon.

Time to go get a moped?
I think so.

Patrick

Prices falling thru the weekend

If you can wait to fill up, I would definitely do so. While Speedway’s jump to 3.75 seemed predictable days ago, wholesale prices have taken a decent size fall since then, losing 10 cents just yesterday.

Most stations that are buying new gas are paying around 3.50 a gallon today, so there is a lot of room for prices to fall, but keep in mind with this added profit coming in, they likely are turning into “Greedway” and not dropping the price as fast as they should.

Weekend prices should be well back into the 3.60s with some stations perhaps dropping to the 3.50s.

Stay Tuned!

Patrick

Terrible DOE report, wholesale prices likely to climb

Seeing as how refiners were losing money for parts of this week refining oil into gasoline, utilization was low. It is rare, but refiners were losing some money last week as the cost of a barrel of oil was *more expensive* than the cost of their finished gasoline. They were losing cents on refining every gallon of gasoline.

Having said that, here are some numbers:

  • Refinery utilization dropped to 82.2%- until the “crack spread” or earnings for each barrel of gasoline exceeds the cost of a barrel of crude, this will stay low. The only way that utilization will rise is if pump prices rise.
  • Crude oil inventories remained unchanged from last week, even though much less crude was produced/imported than usual.
  • Gasoline stockpiles fell 3.3 million barrels. This isn’t a surprise due to the issues I stated above about no profit from refining
  • Midwest PADD storage fell to 56+ million barrels from 59+. This is a large drop and we may see any Chicago Discount begin to dry up.

This was a bad report, but local stations have already hiked to way over my previous target of 3.25-3.29. I believe we may see a rehike tomorrow to $3.45-$3.49, so keep an eye out between 9am-10am.

We’re back to usual here folks- pump prices will “march” higher to begin April!

Patrick

Speedway hikes to $3.45… any break soon?

We still have some catching up to do to oil prices. Expect $3.65-$3.70 to be coming down the line in the next few weeks as refiners (not at fault THIS time) pass on their higher crude costs (its the crude producers!) to the consumers.

ExxonMobil will be raking in the profit this quarter as they are one of the worlds largest crude producers outside OPEC.

As I said, prices are in a general rising trend, so there really isn’t much one can do to avoid these prices.

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