Wednesday, May 9, 2012

Energy price update

One month ago, I noted in a post that "the threat of higher gasoline prices is receding." Some readers as well as some economists and analysts noted at the time that energy prices appeared to be tracking the strength of the economy, and that therefore they would rise if the economy improved, and fall if the economy got weaker. My point, in contrast, was that higher gasoline prices were not necessarily a reason to worry about the economy, and in any event, internal market dynamics were already pointing to a decline in gasoline prices. I'm not sure if anyone can claim victory here (are gasoline prices driving the economy, or is the economy driving gasoline prices?), but the issue is important enough to warrant posting some updated charts.

As this first chart shows, gasoline prices at the pump peaked in early April at $3.94/gal. and have fallen since to $3.75, according to the folks at the Automobile Club.

This chart compares the price of gasoline futures (white line) with gasoline prices at the pump (orange line). My point a month ago was that pump prices naturally lag futures prices, and the decline in futures prices was already pointing to declining pump prices. That continues to be the case, so pump prices could fall another 15-20 cents in the next few weeks.

This chart shows the tight correlation between gasoline futures prices and crude oil futures prices. A month ago I noted that gasoline prices were unusually high relative to crude prices, and that this also argued for lower gasoline prices. That is still the case today. So once again, I think the conclusion is that "since pump prices are high relative to wholesale prices, and wholesale prices are high relative to crude prices, it is reasonable to think that pump prices are at least unlikely to rise further, absent a significant increase in crude prices, and could well decline."

In conclusion, to the extent that expensive energy represents a headwind to growth, this is one more reason to not worry about the U.S. economy suffering a relapse.


Benjamin Cole said...

This chart reveals why the inflation-hysteria around oil prices is misplaced.

Unlike equities, or perhaps gold, there is an upper limit on oil prices. Supply and demand kick in, as well as substitution and alternative fuels.

One q: How is it people say speculators cannot influence the price of oil, unless the Fed is accommodative, in which case speculators will drive the price of oil through the roof?

PerformanceSpeaksForItself said...

Not that I think it will be enough to push the economy in to a recession, but keep in mind pipelines from Cushing to the Gulf are reversing June 1. I would expect WTI to move towards Brent, rather than vice-versa.

4katzz said...

We have taken a position in DTO today.

An excellent article by the author, with a reasonable explanation...


Anonymous said...

If unadjusted initial claims last week declined from the previous week by about the same amount as they did the corresponding week last year (which is no guarantee, just saying "if"), tomorrow's initial claims report should print an adjusted number in the low-mid 340,000's. Even if the unadjusted number is about the same as the previous week, the headline number will still be in the mid-350,000's.

Anonymous said...

Disclaimer for above: Last year might have been an outlier for the last week of April in unadjusted claims. Currently it looks like the pattern from 2010 is repeating, which, if it does, gives us an unadjusted decline of about 3.7%, and the seasonal factor for last week would then give us a headline number in the mid-360,000's.

In either case there would have to be a large increase in unadjusted claims to produce a large increase in adjusted claims.

bob wright said...

My question is from the 3rd chart.

What happened around 2004 that oil prices increased so much - rising from around $35/barrel to

Scott Grannis said...

All commodities started increasing from 2002 through early 2008, thanks to accommodative monetary policy, a weak dollar, and booming global economies.

Benjamin Cole said...


If speculators do not play a role in oil prices, then by what mechanism does an accommodative monetary policy drive up oil prices (aside from creating a growth economy)?

Richard Fisher, Dallas Fed president and a man with a perverse fixation on inflation (he even told the Japanese that inflation is a "evil rot"), says it was the Fed that caused commodities to go boom-boom-boom.

Then realizing what he had said---that speculators are in fact booming commodities prices, a position that is not GOP orthodoxy---he backed off and said his staff would study the issue. They are still studying.

But if it is real global markets (supply and demand) that settle commodities prices, how is it possible for speculators to influence commodities prices?

Or do speculators force prices higher?

So, speculators cannot control oil prices, except when there is an accommodative Fed, in which case they can send oil prices through the roof?

Something is not gelling here....

Benjamin Cole said...

Well, Bill Gross (a nice guy) has been wrong about just about everything lately, but here is what he says,

Gross Says QE3 Getting Closer as Goldman Sees Easing
By Wes Goodman - May 9, 2012 12:22 AM PT
Pacific Investment Management Co.’s Bill Gross and Jan Hatzius at Goldman Sachs Group Inc. (GS) say investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing U.S. economy.
A decision to buy more debt is “getting closer,” Gross, who runs Pimco's Total Return Fund, the world’s largest mutual fund, wrote on Twitter yesterday. Hatzius, the chief economist at New York-based Goldman Sachs, predicted in a report the same day that the Fed will announce additional monetary easing when it meets in June.

Prospects for a third round of central bank asset purchases, known as quantitative easing, or QE, increased after a Labor Department report May 4 showed U.S. employers added 115,000 jobs in April, the smallest gain in six months. Europe’s debt crisis is threatening to slow global growth. Ten-year Treasury yields fell to 1.81 percent yesterday, approaching the record low of 1.67 percent set Sept. 23.

Scott Grannis said...

There are lots of ways that accommodative monetary policy can lead to higher commodity prices. Speculators can play a role by accumulating inventory, and even producers can speculate by producing less or just keeping their oil in the ground. But most importantly "easy money" means the Fed supplies more dollars to the world than the world wants, and this erodes the dollar's purchasing power, just like a bumper crop of wheat can push down the price of wheat. The dollar's value has declined significantly against most currencies over the past decade and that is prima facie evidence that the Fed has oversupplied dollars to the world.

Benjamin Cole said...


The dollar declined against other currencies, but mostly from 2000 to 2008. Since then it has roughly landed.

But since start of 2008, oil went to $147, back down to $47 and then up to $100.

Are you sure US domestic monetary policy has anything to do with global oil prices?