Crude prices get ruder

I recently spent several days at the Society of Independent Gasoline Marketers of America Spring Convention held in Hilton Head, S.C. The group is made up of some of the larger petroleum marketers in America, and the topic of several educational sessions was the reason for current crude prices and the outlook for the future. Here, in a nutshell, was the take away from those sessions.

In general, most of the current action on crude prices is coming from market activity with a notable spike from our currently devalued dollar. There’s nothing much new there. I can remember Dan Gilligan, president of the Petroleum Marketers Association of America, highlighting this concern on a cable news business program (much to their discomfort at his shifting the gouging claim to its sacred cow) as far back as Hurricane Katrina, and Shane Sweet and the New England Fuel Institute has been pounding home the ‘Close the Enron Loophole” message for some time now.

However, the SIGMA session speakers suggested that focusing just on the speculative and manipulative aspects of the current market activities are a bit short sighted. One analyst noted that while speculation is rampant, especially in the less transparent or dark markets like the Intercontinental Exchange, the likelihood of actual manipulation is probably fairly small as a percentage of the total activity.

Another analyst noted that while there are plenty of speculators there is also an awful lot of institutional money ‘ pension funds and the wealthy, etc. ‘ that have moved into the energy markets as a hedge of inflation after exiting real estate. Current trading velocity in the oil markets has increased enormously in the past couple of years ‘ far beyond typical market activity. This promises even higher prices up until this current market bubble pops or otherwise deflates.

There are some things that could be done at the federal level to encourage a ‘deflation,” such as releasing product from the Strategic Petroleum Reserve, but there seems to be little will to push that along (even though it would at best be a minor measure). Sweet’s participation in a CFTC task force on the subject was lauded, but with the ominous note that he is virtually the only representative that is not part of a major financial institution leading to questions about just how fair and balanced the process will ultimately be as it moves forward.

So where will we be come next heating season? Hard to say, except the momentum on prices is moving upwards as we speak and the 2008 heating season is not that far away. Long term, oil analyst Peter Beutel offers some insight in his piece on the current markets in this issues’ Literature Showcase. Relief might not be just around the corner, but it might not be that far away either. And the deflation from current prices promises to be fairly dramatic when that day arrives.