Friday, December 19, 2008

The End of the Oil Price Bull Run, Not




Light, sweet crude for January 2009 delivery reached a low of $33.87 on last Friday (19 Dec), the lowest since early 2004. The rapid fall in oil price in recent weeks was said to be due to reduced demand resulting from the weakening economy. Does this mean that we can return to our gas-guzzling way of life? as a person concerned about the environment, I sure do not want to see that happening. As an investor, I have more choices.

Data from the US Department of Energy site shows that, the retail price of gasoline in the US was falling in the last few months at a rapid rate. One press report suggested that the retail price had been falling for 86 days previously, but rose on Friday. The DOE data shows that actual gasoline supply has started going up since the week ending 28 November, although the increase was small.
The graph of motor gasoline supplied over the last 18 years is an interesting one. It shows that US actual demand for motor gasoline was rising since 1992, but peaked in late 2007. Since then, it has been in decline and also the range has narrowed. In other words, the demand was rising even when oil price was increasing rapidly from 2005 to 2006. We can speculate that the headwind caused by higher oil price on demand only reached its full strength in late 2007. Maybe because the world economy was growing robustly between 2005 and 2006 and that supported the rise in demand despite the higher oil price.
The scenario today is a weakening world economy and very low oil price. The demand for gasoline in the US dropped from a weekly volume of about 9.3 million barrels to just over 9 million barrels before 21 November, and has been climbing by a few thousand barrels per week.
Also, futures of the crude delivery in February has risen to $42.36, an increase of 69 cents since the day before.
Governments around the world are busy printing money and lowering interest rate. In about a year's time, asset prices may feel the effect. Let's hope for my portfolio and my environment that oil price will go back up to around $60 before the end of 2009.

btw, I heard that Snowballs has just got married. If so, congratulations!




2 comments:

Snowball said...

Thanks Chiu Ying!

We appreciate the many insights we gain from your thought provoking articles. Keep 'em coming!

C. Y. Wong said...

This link http://seekingalpha.com/article/114754-crude-reality-how-long-can-oil-stay-down contains one of the best discussions on the factors determining oil price. Don’t miss the comments section. The main argument centers on the question of what is the cost of supplying oil. Some say it is as low as $10, others argue that that only applies to brownfield supply, not greenfield supply where drilling has yet to start. Another point is about supply in the USA, whether a new oil deposit in Bakken area of USA will increase supply substantially. Some say it has a huge reserve, others say not much of the reserve is recoverable at current price of under $40 per gallon of gasoline.

Yet others debated what does the large number of oil tankers being used to store oil at sea means. Some say it means there is inadequate demand for oil, others say it reflects expectation that oil price will go higher. I think the latter argument makes more sense. If there is inadequate demand, then cut supply more, why pump it out at all. Or just lower the selling price more.

The price of crude oil has been falling since July last year. It would seem unlikely that the new lower price level has not made any impact on the economies around the world, such as in reducing the cost of operations of high energy consuming industries. Of course, the recession has hit businesses hard, so the benefit from lower energy cost alone will not be sufficient to bring the economy back. We probably have to wait for the credit situation to continue easing for a few more months to see some noticeable improvment in the economies.

Articles in WSJ Asia today provided a good explanation of the relationship between oil refiners and oil price. Oil refining margins recently reached a height of $12 per barrel compared to two cents a barrel at the beginning of the year (this year or last?!) This happens when less oil is being refined. The third largest refiner in US, Tesoro Corp., saw earnings increased.

The increase in margin is caused by increase in gasoline price when crude oil price is going down. Oil future prices went down 16% since the beginning of the year, while that for gasoline went up by 16%. Demand for gasoline is weak, but supply is tight. On 15 Jan, NYMEX futures fell $1.81 to $35.47, while gasoline futures fell $0.0388 to $1.13 a gallon, or 30 cents a liter. At the pump, gasoline sold for $1.792 on average. A month ago, it was at $1.66. The US Energy Information Administration expects a gallon of gasoline to sell for $1.75 to $1.76 until April. Does it mean that stocks of refiners such as Valero, Marathon and Frontier are good buys now? Their share prices sure look like to have bottomed. If the gasoline pump price stays firm at above $1.75 a gallon, buying their stocks at the current level may not be a bad idea.