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April 30, 2006

The Message of the Market


by Jeff Miller, CEO, Gas-Lock Advisors LLC
(click to enlarge)
forward_curve.jpgThe crude oil futures market carries a message—one that we monitor constantly. The price of oil you see quoted in the news is the front month spot price, usually for Texas Intermediate crude oil. There is trading in futures for delivery of oil years from now. A contract for delivery in Dec. 2012 will trade continuously until it expires.

If you arrange all of the contracts in a chart, you can see not only the current price of oil, but what market participants expect for the future. This is called a “forward curve.”

In this chart (see above) we show three forward curves. The bottom curve is from two years ago. Oil prices were close to $40/barrel, but this was viewed as temporary. The forward curve falls close to $30/barrel within two years, and below that level soon afterward.

By 2005 the situation was dramatically different. Not only was oil trading for more than $50/barrel, the expectation was that prices would move higher over the next six months.

traffic_1.jpgMoving out several years on the curve, the expectation is that prices would fall slightly below the $50 level.

In the 2006 forward curve, we see the implicit market prediction that $70/barrel is here to stay. Prices are expected to move above $75/barrel before going lower.

In short, the market is telling us that current pricing is not just a temporary spike, and that the near-term risk is for higher prices.

Future columns will discuss the trading behind the curve—the players and their motivations.

(This article was previously published in the print version of “Pumps,” vol. 1)

Filed under:Fleet Managers,Fuel Price Trends,Hedging,Price Shocks | by Pump Girl @ 2:50 pm | 

At a Gas Station Near You — $3 Gasoline


Temporary Spike or a new Trading Range?

When prices move higher, it is sometimes a reflection of temporary conditions. Last year’s hurricane season is a good example.

The recent price surge seems different, more linked to underlying market fundamentals. While we do not embrace some of the spectacular predictions about oil and fuel prices, there is increased risk.

A look at some basic facts about supply and demand provides the right perspective.

graph_chinaoilproduction20.gifThere were ten million vehicles on Chinese roads in 1995 and now there are 27.5 million. Growth is rapid — and it is just getting started.
China has already become the second largest oil consumer in the world. Industrial demand is “soaring.” (WSJ)

The US consumes 25% of global oil supplies and “shows no sign of slowing.” (WSJ)

Refinery operations have been running at over 95% of capacity, with little chance for maintenance.

Demand is growing more rapidly than capacity, making this problem worse.

graph_oilconsumption2005.gifSoaring Demand — Restricted Supply

There is not enough slack to absorb any shocks to the system. This creates a climate where major gas price increases are more likely.

(This article was previously published in the print version of “Pumps”, Vol. 1)

Filed under:Causes and Solutions,Fleet Managers,Fuel Price Trends,Price Shocks | by Pump Girl @ 2:23 pm |