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Got Gas?

HAVING TROUBLE PRINTING?
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The price of gasoline rose to a national average of $3.26 per gallon according to one survey while another survey claimed $3.22. Either number would be a record high even after adjusting the prior high of $1.42 in 1981 for inflation. Adjusting for inflation that $1.42 high converts to $3.22. Whatever number you want to use the price of gasoline is at record levels as the summer driving season begins this weekend. I am in Albuquerque this weekend and I paid $3.59 for gas just outside Santa Fe. Those drivers on the coasts are paying even more and odds are good there are some $4 gallons being sold this weekend. 38 million people will travel more than 60 miles for the holiday. The national average has a long way to go to hit that level and the lower prices in the heartland will probably prevent it from happening unless a hurricane blows through the Gulf. Meanwhile the refiners continue to print money.

The "penalize big oil movement" awakened in Congress again and they again started making noises about breaking up the big companies or windfall profit taxes. Most lawmakers don't realize the oil companies really don't determine the cost of oil or gasoline. It is set by the global market. With gas prices hitting all time records it is easy to blame big oil but the sad fact is expenses are rising sharply, demand is increasing, supplies are shrinking and the big oil companies only produce a fraction of the global production. National oil companies like Saudi Aramco, PDVSA and the various nationalized OPEC entities produce the vas majority of oil. Exxon, Conoco or Chevron could not impact the price if they wanted to without losing money on their operations.

For instance Exxon has more than 45,000 service stations in over 100 countries around the world. Each day they sell more than 100 million gallons of gasoline. Less than 10% of the oil used to refine this gasoline is produced by Exxon. The rest is bought by Exxon on the open market. For a company of this scale to make $9 billion a quarter in profits may seem extreme but considering the magnitude of the enterprise that breaks down to about a 10% profit margin. Pretty remarkable but far less than companies like Citigroup (33%), Microsoft (32%) and Coke (21%) to name a few. Congress is not trying to breakup Citigroup or Coke.

A typical barrel of oil produces about 19.5 gallons of gasoline, 9 gallons of fuel oil, 4 gallons of jet fuel and 9 gallons of other products including lubricants, kerosene, asphalt and chemical feedstocks used to make other products like plastic. Light sweet crude produces more gasoline while heavy sour crude produces less. The table below shows how the price of gasoline is broken down into its component parts. These are rough estimates from the EIA in early 2006. The biggest portion is obviously exploration and production but those same producers are seeing their costs per barrel climb sharply. Those producer costs are rising even faster as countries nationalize assets and impose additional taxes and fees many times approaching 75% of the price of the barrel.

Gasoline Cost Breakdown Table

The two day sell off in oil prices was due in part to a jump in refinery utilization from 89.5% to 91.1% over the past week indicating the recent challenges are being slowly overcome. Gasoline inventories rose +1.4 mb last week but some of that was due to the Colonial pipeline running at capacity and unable to accept any additional fuel. Still, inventory levels are well below normal and refinery utilization needs to continue climbing to a normal summer range around 94% to catch up to demand. That demand is up +1.7% year to date but below the +2% level reached early in the year before prices began to accelerate.

This is the 30th anniversary of Star Wars and the networks were full of comparisons to prices in 1977. Gasoline hit $1 for the first time when crude oil hit the unbelievable price of $20 per barrel. Personally that is not as shocking to me as realizing Princes Leia is now 51, Luke Skywalker is 56 and the dashing hero Hans Solo is now 65. The Dow was stuck in what seemed to be a permanent range at 900.

Next week should see oil prices continue to rebound from the bout of profit taking we saw on Thursday with developments in Iran, the strike in Nigeria and any weather developments in the gulf the primary movers. Prices should remain over $64 but under $68 unless one of those events produces another round of panic buying. The 100-day average is providing support at $63 with downtrend resistance at $67.

Apple, Terex, Marathon and SUN were big winners this week with Deutsche Bank the biggest loser. The Beazer put and Toll Brothers call might be finally moving in our favor. BZH fell nearly $4 from its Thursday high. While our main focus is still energy stocks those non-energy plays can keep us in trades while we wait for the hurricanes.

Jim Brown


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