Ramblings of a Portfolio Manager- Whither oil?
Memorial Day Weekend is in the rear view mirror and, predictably, we had a run up in gasoline prices ahead of the kick off to the unofficial start of summer. AAA had widely predicted that Americans would drive more miles over this weekend than the same time last year, the first year-over-year increase in two years. The pre-holiday run in gasoline prices had at least one politician, CT Attorney General Blumenthal, calling for an investigation into the price rise. AAA estimates that Americans drive approximately 800 billion of their annual 2,922 trillion (27%) annual mileage in the 100 days between Memorial Day and Labor Day. Interestingly, that period represents 27% of the total driving days in the year. Taking off our cynical hats for a moment, we make the assumption that Attorney Blumenthal has seen this data and is, in fact, an efficient market hypothesis adherent who simply cannot fathom the irrationality of the timing of the price rise. The fact is that demand for refined products, like gasoline, do tend rise over May through August timeframe, while demand for high sulfur distillates, like heating oil and diesel, tend to decline. Overall, US oil consumption tends to be relatively flat over the year, all else being equal. Given a fixed amount of refinery capacity in this country, then, the simple laws of supply and demand would dictate that in the short run, gasoline prices would rise with demand until refineries adjust their output mix to match, while prices of less refined products would correspondingly drop. Why refineries don’t recognize the annual pattern and proactively adjust ahead of time is beyond the scope of this Ramblings. We do, however, share Attorney Blumenthal’s skepticism that gasoline should enjoy a permanent premium during the summer months. Of course, we also smile when the price of oil, a global commodity, spikes ahead of an expected cold spell in Chicago or New York.
The larger question is why world oil prices have risen so much in recent months? Oil has climbed approximately 76% since its mid-February low of $34/bbl and has essentially traced the rise in the US equities market since. Americans represent approximately 25% of world oil consumption and that includes industrial (manufacturing, utilities) as well as personal (autos & home heating) consumption. An expected seasonal increase in US driving and hope for a recovery in the US economy, then, can only be part of the story. The fact is many factors influence the spot price of oil including the US Dollar, expected world economic demand, and just a dash of speculation. Like equity markets, energy and commodity markets are to a large degree discounting mechanisms. Right now they are discounting greater demand down the road, although we suspect there is a fair dose of speculative premium in the current spot price.
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