The good news is that I almost nailed the Nymex oil price in my previous Saturday oil report. The Nymex came in at $85.28 yesterday following a sell-off after Egypt's long-time dictator Hosni Mubarak resigned. I had predicted oil would be trading in the $86-$88 range. The bad news is that the Nymex price is totally out-of-sync with the price of oil in every other important world market.
Brent is selling at $99.85, Tapis is at $104.75, the Urals blend goes for $97.42, and so on. What's going on? Let's look at the evidence.
- I am not aware of any story (or even plausible rumor) providing solid evidence that the world oil markets are not well-supplied. OPEC nations have been exceeding their production quotas, and OPEC (Saudi Arabia) just boosted their output—
In a monthly report on Thursday, the Organization of the Petroleum Exporting Countries said its January production rose by 400,000 barrels per day (bpd) to 29.72 million bpd, the highest since December 2008 when the group announced a record production cut.
- Oil demand in the United States is stagnant, and inventories are well-above their average range.
- The dollar index (DXY) stands at 78.46, down from it's 1-year high of 88.43 in June, 2010. Oil must be purchased using dollars.
- Fed bond-buying (QE 2) has resulted in higher commodity prices worldwide. The FAO's food index just reached a new record high. In effect, when the Fed chases dollars out of Treasuries into riskier assets, they are exporting inflation by flooding foreign markets with these dollars. Investment and speculative money is not flowing into the United States, although these new dollars are printed in the United States. There's little doubt that some of these dollars are going into oil (and commodities generally).
- Commodities demand in emerging markets (China, India, and the rest) remains robust, but these markets are also beset by unacceptable levels of inflation.
My view based on all of the above is that Nymex oil is underpriced, and oil in the other markets is overpriced. My best guess, based on market fundamentals (demand, inventories, etc.) is that oil should be trading the $88-$92 range everywhere, although there will always be a premium for light, sweet crude. This is why that I am keeping the alarm level at last week's level.
Oil Alarm Level — Orange
Despite large fluctuations in the Nymex price, gasoline prices continue to rise (Yahoo) —
Closer to home, U.S gasoline prices are the highest ever for this time of year. Since Jan. 1, pump prices have averaged well above $3 per gallon. They hit $3.127 per gallon Friday, 3.4 cents higher than the same time last month and 49.1 cents more than a year ago, according to auto club AAA, Wright Express and Oil Price Information Service.
The dramatic jump brings back memories of three years ago, when pump prices rose above $4 a gallon, forcing many drivers to join car pools and trade in gas-guzzling SUVs for more fuel-efficient cars. But "it would be a mistake to think we're going to have that all over again," OPIS chief oil analyst Tom Kloza said.
Gasoline prices have climbed this year for a number of reasons; including a rise in oil demand from China, a frigid winter and tensions in Egypt, Kloza said. Crude demand will slide in the U.S. by May, as U.S. refineries slow down fuel production to purge stocks of winter fuels as they switch to summer blends.
Kloza said the biggest difference between now and 2008 is that oil traders are much more cautious. After rising above $147 per barrel three years ago, oil prices tumbled to below $33 per barrel in 2009. The market remembers that, he said, and even the most bullish traders no longer think they can chase commodity prices ever higher without any risk.
Whatever you think of Kloza's analysis, I agree that 2011 is not like 2008. I've still got the next oil price shock coming in 2013 ± 1 year. So in my view, 2013 will be like 2008, but we might see a price shock in 2012. I think Nymex oil prices will average about $92/barrel this year. The timing is very dependent on what happens to China's economy and oil demand.
My prediction for the oil price on February 26? For Nymex, I think the price will be in the $87-$89 range. For Brent and several of the other varieties, I think the price will remain in the $97-$101 range. Thus I expect the price disparities to continue.
Bonus Video — Stephen Leeb is selling his books