The Bin Laden Effect on the Oil and Gasoline Market

ExxonMobil's map showing areas of the US with boutique gasoline summer blend requirements.

The oil market turned around this week and spot market gasoline and diesel prices in turn went back down the week of May 1, 2011. This goes against the grain of what usually happens when American Petroleum Industry (API) and Department of Energy (DOE) inventory reports show draws for both gasoline and diesel.

The average price for unleaded gasoline in the US is $3.982 per gallon on Wednesday and may touch $4 by this Friday. But the demand for gasoline is down with numbers from March showing a steep decline showing the effects of the ever increasing gasoline prices. The AAA Fuel Gauge report on May 4, 2011 showed the following gasoline prices:

Regular
Current Avg.
$3.982
Yesterday Avg.
$3.967
Week Ago Avg.
$3.879
Month Ago Avg.
$3.662
Year Ago Avg.
$2.904



Highest Recorded Average Price:
Regular Unl.
$4.114
7/17/2008
DSL.
$4.845
7/17/2008


The national price for unleaded regular gasoline may peek at $4 per gallon with California currently at $4.265 and the State of Washington at $4.018 staying about the same by the end of this week.


The news of Osama Bin Laden's death on the night of Sunday, May 1st gave the country great relief and a chance to celebrate in spite of our economical situation. The dollar stayed weak but prices for both West Texas Intermediate and Brent crude oil went down, which caused wholesale gasoline prices to go down 20 cents per gallon since Monday.


The world woke up Monday morning with a new attitude and oil traders took heed by turning bearish. Last week’s Commodity Futures Trading Commission (CFTC) report showed paper traders with record longs in the market, a position which bets on oil prices continuing increase.


Money managers increased their net length by 2.8%, setting an all-time high when you look at both futures and option positions. However, this report was prepared before this weekend’s big events in Asia and North Africa.U.S. gasoline consumption fell last week and maintained a deficit to year-ago levels. SpendingPulse report showed demand for gasoline decreased by about 93,000 barrels per day (b/d), or 1%, to an average of 9.157 million b/d for the week ending April 29. Compared to the same calendar week in 2010, demand last week was 0.6% lower and the week's demand was 1.2% lower compared to a year ago, it was the second week in a row in which the year-over-year gasoline demand shrank.


US motorists have been told speculators, unrest in the Middle East and North Africa, natural disasters, a weak US dollar and world demand were the causes for the march towards the seeming inevitability of seeing $5 per gallon gasoline at the pump. However, this march towards a never before reached milestone seems to have been broken for the time being.


However, the US Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) set standards for gasoline creating areas in the country with boutique gasoline requirements. That is the main reason for the huge price differentials in parts of the country other than federal and state taxes. The following ExxonMobil map shows areas of the US affected by these oxy fuel or RFG compliance requirements for gasoline:

The worst area of the country to be hit by these requirements is Chicago with gasoline in the Windy City currently the most expensive in the nation at $4.467 per gallon. They perhaps will hit the $4.50 per gallon mark by the end of this week but then prices will come crashing down.

Fair warning the adage: "Gasoline prices shoot up like rocket, drift down like a feather" will apply as major oil companies slow down passing the lower cost for crude oil along to their branded retail station accounts. The independent non-branded station prices will be the ones reacting quick to their new found advantage by lowering their pump prices.

Busting the myth about oil company profits

What can we do to stop commodity speculators from causing the rapid hike in gasoline prices? Arrest them, put them in jail, and try them before a jury before we hang them?

Early last week, President Obama started that ball rolling by telling US Attorney General Eric Holder to stop oil market fraud. Eric Holder promptly announced he was appointing a “working group” focused on rooting out the cases of fraud in the oil markets that might affect gasoline prices. This might work in any other business but the petroleum industry is not going to be simple to control.

Later in the week ExxonMobil reported their 1st quarter profits went up a whopping 69 percent to $10.7 billion from the same quarter a year ago. This ignited a firestorm almost immediately raising the ire of politicians and activists alike, who accused the oil industry of profiteering while Americans pay nearly $4 a gallon for gasoline.

Instead of being good news it was reported as bad news on the front page of major newspapers and became the lead off story on most of the TV and radio news broadcasts.

On the other hand Apple, which showed a 95% increase in net profits in their quarter from $3 billion to $6 billion, had Steve Jobs proudly announce those results in his April 20, 2011 news conference.

No one screamed “Off with their heads!” about Apple’s profits, so why all the brouhaha about ExxonMobil and the other oil company’s profits? Surely they are both stalwart organizations making the capitalistic system work for their shareholders, expecting to receive a fair return on monies invested in those companies. They should be allowed to make a profit with products everyone either wants or needs and you can charge for them according to what the market will bear.

ExxonMobil sent out Ken Cohen, their Vice President of Public and Government Affairs, to face skeptic reporters at a news conference on April 28, 2011. He launched a preemptive public relations strike to blunt expected criticism from politicians and the public about of seeing gasoline pump prices increase along with ExxonMobil’s profits.

The following graph from the US Energy Information Agency (EIA) shows the results of what happens to oil company profits when crude oil prices increase:

Ken Cohen wrote an article entitled: "Gas prices and industry earnings: A few things to think about", which can be read it in full on the ExxonMobil Perspectives blog at http://bit.ly/j2qbkB

ExxonMobil does not own the patents to the iPhone or iPad franchise but they have something even better by being the largest company in an oligopoly made of oil companies producing a product we cannot do without . . . . . . fuel.

A few of the talking points used in Ken Cohen’s article need closer scrutiny and examination since they are now been repeated almost verbatim by pundits and analysts alike:

Point: We don’t own 95 percent of our station, and therefore we don’t set the price.
Counterpoint: The first part is correct; however the retail pricing manager for ExxonMobil checks the spot market regularly during the day and makes wholesale pricing decisions dependent on the area of the country. The methods used by ExxonMobil are rack and zone pricing giving them the ability charge whatever the market will bear. The competitive pricing data is gathered for them by third parties such as Oil Price Information Service and The Lundberg Survey. The latter is the most important one since Lundberg gathers Dealer Tank Wagon (DTW) prices for each locale in which ExxonMobil has retail operations. Rack pricing is used to set the wholesale prices for either branded or unbranded gasoline. The DTW prices are charged to those dealers who have branded supply contracts direct with ExxonMobil. These are not the prices posted on the pumps at the station and are the most secretive part of gasoline retailing. Zone pricing, or a Temporary Voluntary Allowance (TVA) method of pricing, controls almost 85% of all the branded-contracted gasoline sold in the US with the difference sold to unbranded non-contracted stations.

Point: Local stations are often owned by a businessman or businesswoman in your community, and they set their own prices based on local market conditions.
Counterpoint: The owner or dealer of a local station receives deliveries of gasoline with the new wholesale price set by the oil companies, and then adds a margin to the gallon of gasoline. They are contractually obligated with long term supply agreements to only buy from the “branded” supplier with whom they signed up.

Point: For every gallon of gasoline, diesel or finished products we manufactured and sold in the United States in the last three months of 2010, we earned a little more than 2 cents per gallon.
Counterpoint: Adding all the oil company profits together including their upstream, downstream and chemical divisions and then dividing that amount by the total gallons of fuel sold is somewhat misleading. Each one of those is separate profit centers and not the only products sold by the oil company.

Point: Crude oil is a commodity, and like all other commodities – such as corn, wheat or sugar – the price is determined by buyers and sellers in a global market.
Counterpoint: ExxonMobil is one of five “super major" vertically integrated oil companies in the US controlling the process of refining gasoline from the wellhead to the pump. Crude oil, the raw material from which gasoline is refined, is either purchased or obtained from company owned or controlled wells with prices set according to the gravity of the crude oil. ExxonMobil utilizes the Last In/First Out method of accounting and the last price at which crude oil was obtained establishes the posted price for crude oil delivered to their refinery gates.

Point: ExxonMobil owns less than 1 percent of the world’s oil reserves, and it produces less than 3 percent of the world’s daily oil supply.
Counterpoint: ExxonMobil is the largest oil company in the world and when the elephant in the jungle trumpets, the market listens. The throughput of their refineries and percentage of market share have a big influence on the other oil companies’ reaction on how they in turn price their products.

Point: Last year, our total taxes and duties to the US government topped $9.8 billion, which includes an income tax expense of $1.6 billion.
Counterpoint: This is a somewhat misleading statement since taxes and duties include tax credits allowed on payment to foreign governments. It is another subsidy, devised by the US State Department in the 1950s, which allows US based oil companies to reclassify the royalties they are charged by foreign governments as taxes. Those can then be deducted dollar-for-dollar from their domestic tax bill. That provision alone will cost the federal government $8.2 billion over the next decade, according to the Treasury Department. These are currently allowed to be reported as taxes paid to the US Government. The following opinion re-printed from the Harvard Law Review gives a more detailed explanation on how this works:


BP, ChevronTexaco, ConocoPhillips and Shell, the other four super-major oil companies, said their profits rose in the first quarter because of soaring crude prices and other factors.

Members of Congress and President Obama used the record setting earning reports to step up calls for the repeal of the $4 billion in annual depletion allowance tax breaks for oil producers. John Boehner, R-Oh, Speaker of the House, first seemed to want to go along with eliminating this tax break only for the large oil companies but then changed his mind.

Jeff Sheets, Chief Financial Officer of ConocoPhillips, said that while the industry's profits are higher, the margins are still slim compared to the amount of assets oil companies maintain, and profits haven't risen as fast as gasoline prices. “When critics focus only on the bottom-line number, they lose the scope of what's required to produce that profit," Sheets said
.
The industry further argues that ending tax breaks would cut investment in new oil and natural gas projects, cost new jobs and decrease oil and natural gas production.

Senate Majority Leader Harry Reid, D-Nev., said the Senate as early as next week could take up Obama's proposal to halt the tax breaks and President Obama said the $4 billion a year in oil subsidies would be spent on alternative energy investments.

Holding a commodity off the market and then selling it after the price goes up is only one form of speculation, and it’s not one that works very well in the oil market. Simply put when gasoline prices increase so do the profits at the oil companies.

B of A New Oil Price Target Suggests $4.25 Gasoline in the US by Memorial Day

While living in The Hague, Holland as a young boy I often wondered what was on the other side of that vast expanse of water known as the North Sea. How could I have known about the vast crude oil reserves lying underneath the angry waters of the North Sea and its eventual exploration by the countries surrounding it?

Economic zones in the North Sea

Brent geese would fly over my province of South Holland much like Canadian geese fly over Montana on their way south. I now live in Terry, Montana, which is a long distance from Holland and the North Sea, but the word "Brent" once again has once again become part of my every day vocabulary while discussing the reasons for the fuel price increases.

The word Brent was originally derived from the naming policy of Shell UK Exploration and Production, operating on behalf of ExxonMobil and Royal Dutch Shell, which names all of its fields after birds. In the case of their North Sea operations the field was called Brent Goose, which was later shortened by the market to Brent encompassing similar type crude oils being produced in the area.

Brent Crude, Brent Sweet Light Crude, Oseberg, Ekofisk, and Forties are all part of the Brent crude oil sourced from the North Sea and traded on the Intercontinental Exchange in London (ICE). The Brent crude oil marker is also known as Brent Blend, London Brent and Brent Petroleum and is used to price two thirds of the world's internationally traded crude oil supplies.

Why has the Brent crude oil benchmark price become so important to consumers of gasoline and diesel? The answer: It just recently replaced the New York Mercantile Exchange (Nymex) West Texas Intermediate (WTI) as the reference price for other “crude oil baskets” such as OPEC, Dubai, Russian and even Alaska North Slope crude oils.

The problem lies with the US Commodity Futures Trading Commission (CFTC) not having the power to regulate commodity transactions on the ICE. The big money is being moved into Brent and ICE thereby bypassing the Nymex and putting the WTI crude oil secondary to Brent. Even the Alaska North Slope crude oil posting is now tracking the Brent crude oil posting.

Bank of America Merrill Lynch recently increased its forecast for benchmark Brent crude for 2011 to $122 a barrel, and said that Brent could “briefly” surge above $140 a barrel in the second quarter of 2011. For WTI crude oil, the bank forecasted an average of $101 a barrel for this year, up from $87.

Bank of America also forecasted a 30 percent chance the price of Brent crude oil would reach $160 per barrel in 2011 with global demand for oil increasing and Libya supplying about 1 million barrels per day less than it did before the NATO coalition bombing started on March 19, 2011.

Each dollar differential in the price a barrel of crude oil represents 2.4 cents per gallon change for gasoline and diesel. When the price reaches the $140 level, it will add another 40 cent per gallon to today’s $3.856 per gallon national average price for unleaded gasoline per AAA Daily Fuel Gauge Report. That means $4.25 per gallon for regular gasoline by the end of May, which is right at the beginning of the summer driving season.

The average gasoline price in the US could reach $4.75 per gallon if the Brent crude oil reaches the predicted $160 a barrel sometime this year.

Crude oil prices now are determined not so much by supply and demand but by financial markets like the Nymex and ICE. Most oil is traded using derivative financial instruments that are not based on the physical exchange of crude oil (wet barrels in the trade) between seller and buyer. In the 1990's, physical transactions accounted for about 30 percent of oil traded, but they now number less than 1 percent of contracts traded on the various exchanges.

Crude oil prices soared to new highs in 2005 when U.S. pension funds were permitted to invest their members’ retirement monies in oil futures. The US Congress convened a special hearing in 2008 after prices soared to $147 a barrel for WTI crude oil to consider the influence that speculation has on crude oil prices. Analysts calculated for each $100 million pumped into the oil market the price per barrel was pushed up by 1.6 percent.

In effect, oil has become a speculative commodity whose price is determined by how investors anticipate its value will increase or decrease at a given point in the future.
No sooner had Bank of America Merrill Lynch given its “bullish” prediction than the commodities market rallied and the price of Brent oil surpassed $120 per barrel. Nonetheless, do analysts have at least some idea of an upper limit to prices?

The two dominant theories of the 1970's and 1980's held that oil prices were limited by the prices for alternative energy sources to crude oil or, by contrast, that the price ceiling was determined by the purchasing power of oil consumers who are also unable to reduce demand. This is just partly true today.

In the end, the main “energy resource” of the past 40 years was not oil but energy efficiency, and consumers’ ability to save money by reducing consumption and using alternative energy sources as prices increased.

Prepare for a drop in diesel and gasoline prices

September 20, 2009 5:30 PM MDT

You will soon be paying under $2 per gallon again for gasoline and diesel fuel and crude oil will go back down into the 40's. So you can make plans for that trip to see the grandparents for the holidays as well as give the economy a much needed boost. Demand for gasoline in the United States typically falls after Labor Day due to vacation season ending. For the week ending September 4, 2009 demand for gasoline was at its lowest point since January 9, 2008 according to MasterCard Advisors LLC.

Inversion of diesel fuel versus gasoline prices has not been the case in the United States since the Rita and Katrina hurricanes hit the Gulf Coast in August 2005. That event had a major long term impact on inventories of gasoline, distillates and lube stocks on both side of the border. About 25% of the U.S. refinery capacity is located on the Gulf and was severely affected by the weather phenomenon.

Money has been poured into the commodities markets recently as the U.S. dollar fell against the Euro. Crude oil prices have risen from a low of $33 to $72 a barrel last week.

For month investors months have used crude oil as their hedge against inflation, betting that oil prices will likely increase as the economy improves and global supplies start to shrink.

So far 2009 has turned into the first normal year for the petroleum markets since 2004 due to the absence of the high roller speculators and adverse weather conditions. Those investors were burned in the big oil price freefall during the second half of 2008 by following bad advice from their investment brokers.

In August 2009 the U.S. Security and Exchange Commission took initial steps to enforce the strict limitations on dealings between bankers and stock analysts. The law requires investment firms to engage in “fair dealings with customers” and prohibits in-house analysts from issuing opinions and research reports that are at odds with their true beliefs about the market. These opinions are spread fast, far and wide utilizing today’s high tech communications.

The market is also very nervous after news that the Chicago Mercantile Exchange (CME) Group, which runs the New York Mercantile Exchange (NYMEX), notified traders and brokers of tighter enforcement of existing position limits on NYMEX, CME, and other exchanges as of September 14, 2009.

US oil refiners, who were producing diesel in record numbers last year, reversed course earlier this year and made their refining stream fall in line with the flat demand for gasoline and the ever shrinking demand for diesel fuel. Refinery runs have drifted down to 86.94% of capacity from the previous week's 87.2%. Inventories of crude oil and its finished products are at all time high.

That will have the affect of starting the downward slide for gasoline and diesel fuel prices with the price of crude oil following right along.

Bob van der Valk is the Director of US Branded Licensing and Fuel-Pricing Analyst with 4Refuel Inc. in Lynnwood, Washington and can be contacted at (425) 216-9072 or by email at bvan@4refuel.com and web site: http://www.4refuel.com/

Bob’s professional web site is: www.4vqp.com/ourconsultants/thegasguy.html
Any views expressed in this newsletter are those of the writer, except where the writer specifically states them to be the views of the 4Refuel group of companies.

Gas prices will fizzle out by October

The van der Valk Gas Price Advisory for September 1, 2009

Dateline: Terry, Montana

We have had some dog days here in Terry, Montana this summer and the price of gasoline has been scorching upward right along with the heat. The spot market for gasoline and diesel prices dropped like a rock Monday, but Tuesday morning brought new hope and both of them are both back up. Gasoline is heading the pack but the price of crude oil is back down some more to $68.05 down $1.91 a barrel for the day.

For a further explanation on why gasoline prices are going up while we are still suffering from a recession we look toward the stalwart of all banking institutions, Bank of America (BAC), and its subsidiary Merrill Lynch.

In a report to investors Francisco Blanch, head of commodities research at Merrill Lynch, said that investors are flocking back into commodities after substantial withdrawals in the second part of last year, on the back of rising prices and a recovery in risk appetite.

"Our estimates put the total amount of money currently invested in commodity indices at about $125 billion, up from a trough of $80 billion dollars in February," he said.

But it does not explain that people filling up their tanks are paying more and driving less due to a slacking economy. The unemployment rate has almost doubled from 5 % in April 2008 to 9.7 % in July 2009 per today's U.S. Bureau of Labor Statistics.

Crude prices have been driven higher since the first of this year by a combination of OPEC capacity cuts and continued strong demand from Asia, particularly China and India. China’s oil demand in July increased 3.5% over the same period last year as imports continue to rise. This has pushed the price of crude up even though consumption is down around the world. But the winter months will exacerbate this already clouded picture with crude oil expected to steep downward from the current $70 to $40 a barrel.

Crude oil and gasoline prices will be scorchers for just another month and like comets fizzle out over the horizon with a trail of rocks tailing behind. Fall will bring welcome relief to the exhausted gasoline consumers. The other good news they will be enjoying is lower heating oil and natural gas prices. Diesel prices will move down with crude oil prices and red dye diesel will be down to $1.50 per gallon in time for a cold winter predicted for most of the country. There seems to be no floor on the price of natural gas, which is now at around $2.50 per million cubic feet versus $16.25 just a year ago.

The lull before the storm for gasoline prices

The van der Valk Gas Price Advisory for August 28, 2009

Dateline: Issaquah, Washington
By: Bob van der Valk
August 28, 2009 9:00 AM PDT

Right now there is a tropical depression named Terry (after my hometown in Montana) but it is slowly becoming a storm and will then turn into a full fledged hurricane. Of course, I am referring to what is happening with gasoline pump prices. The average price of gasoline over the last seven days has not changed precipitously but that is quickly changing on the oil market weather map. The AAA fuelgauge report shows the national average price of self-serve regular gas is $2.613 per gallon on Friday, down just over a penny from a week ago. The national average price of diesel fuel is $2.697 a gallon, up just over a penny.

For much of 2009, crude oil prices have gone steadily upward from the low 30's to the middle 70's. Meanwhile pump prices have increased nationwide from $1.50 to $2.60 per gallon. At 42 gallons to a barrel of crude each $10 represents about 25 cents per gallon increase or decrease for gasoline. But the market has reacted to the current recession just the opposite of traditional supply and demand dynamics. Instead of gasoline prices staying steady, they went up while the US and Canadian economies were going through their doldrums.

About 50% of the trades on the Nymex and ICE exchanges represent entities who will not take the delivery of one wet barrel of crude oil or fuel when their contracts expire. That is down from 55% at the same time last year before the crude oil price bubble burst. However, it is still higher than the 20% of traders holding paper barrels in 2000. That year is significant because that is when the CTFC took volume requirement off traders dealing on international exchanges. Speculators did what speculators do best and figured out a way to game the system in order to make money.

The big boys are now investing huge amounts of money on the US dollar as a hedge against inflation as well as flow money into the commodities markets, which has served as the primary driver of oil prices.

Gasoline prices are highest in Hawaii, at $3.297 a gallon, and cheapest in South Carolina, at $2.38 a gallon. California meanwhile has remained stable during the week, averaging $3.046 a gallon. The highest price for gasoline is San Francisco, where the average cost is $3.133 a gallon. The cheapest market is Yuba City, with an average price of $2.948 a gallon.

The Labor Day weekend is just a week away and the spot market prices for gasoline have already firmed up. That will translate into higher prices at the gas pump at least until the middle of September. By then the hurricane season for gasoline prices will come to an end when oil companies start switching to refining winter grade gasoline. The supply of gasoline and diesel will increase by 10% and pump prices will ease back down to $2 per gallon by Thanksgiving and crude oil to the 40's.

The insider’s secret on how gasoline is priced

Dateline: Terry, Montana
June 18, 2009 11:00 AM MDT
By: Bob van der Valk

After emigrating to the U.S. from Holland, at the young age of 15, I learned to speak English by watching Saturday morning cartoons and listening to Elvis Presley songs on the radio.

English was a mysterious language to me and it took a while before I caught on to the finer nuances of speaking English. The kids at North Miami High School in Florida thought that my Bugs Bunny and Elvis Presley voice impressions were a riot and I l quickly was able some good friends.

The U.S. and Canadian motoring public learn much about the cause of the wild gas price gyrations from the same type of sources.

Crude oil prices are usually made out to be the culprit and blamed by the media for the gas price roller coaster rides. But is not the only factor in the current round of fuel price spikes. Today gas prices tend to influence and support crude oil prices. That opinion runs counter to the conventional view that crude oil drives gasoline prices.

It is the inverse of what occurred with fuel prices in 2007 and early 2008 in the petroleum industry. Since August last year, fuel prices have been driving crude oil prices up and down.

It is my prediction that crude oil may hit $85 in the near term and then ebb back down to $40 by the fall of this year. By Christmas 2009 the price of gasoline in the U.S. should be around $2 per gallon with Canada at 90 cents per liter.

In early August 2008, I made a forecast, published in the Pasadena (CA) Star News, that crude oil and gasoline prices would go down in the last part of 2008. In August, crude oil was still hovering around $140 a barrel and gasoline was over $4 a gallon in the U.S.

By December 2008 the average price of crude oil was $33 a barrel and gasoline was at $1.60 per gallon. That severe drop was aggravated by the economy’s plunge into its recession along with the financial crisis.

I made a prediction in the January 2009 that gas prices would hit $3 per gallon again by the summer as quoted in the following article:

http://www.insidesocal.com/news247/2009/01/gas-prices-could-reach-3-by-su.html

I have been in the petroleum industry for almost 50 years with all that time spent in the refining and marketing (R & M) end of the business. In my early career I worked in the retail and wholesale departments for Union Oil Company of California a.k.a. Unocal in Los Angeles. This should qualify me as the ultimate insider and expert on the way the petroleum industry prices gasoline.

The U.S. petroleum industry has returned to the basics of refining crude oil into gasoline. Major oil companies have the ability to explore and produce for crude oil and bring it up out of the ground for around $40 a barrel. Any amount over that price is pure profit to the oil companies.

The competitive battle between Exploration & Production (E &P) and R & M managers at the oil companies is back on. Each cannot stand to see the other make all the profits for their company.

In the days before the price of crude oil became paper driven, the R & M department used to have knockdown-drag out fights with the E & P department about the price of crude oil delivered to our refinery gate. In those days, they would price crude oil based on price posted at the well plus transportation costs. R & M would then add the cost to refine the crude into fuels and add the marketing cost to determine the wholesale or dealer tank wagon prices.

Today, they take the easy way out and relate their refinery gate crude oil price to the West Texas Intermediate (WTI) crude oil price plus or minus a discount for quality and location. For instance, the posted price for Elm Coulee crude oil in Richland, Montana is currently fetching the WTI daily posted price less $10 a barrel at the well head. R & M still has to add their costs to that price and relate that to the current wholesale and retail prices in order to stay competitive.

In March of 2001 Tom O’Malley, then CEO of Tosco, got tired of losing money for part of the year then trying to make it back during the spring time and summer driving seasons. He announced to his refining and marketing management team at a company meeting in their Phoenix headquarters, that they would tie their retail prices to the wholesale spot market price for gasoline and diesel.

The petroleum market is driven by trades in paper barrels for crude oil and finished products on the New York Mercantile Exchange (NYMEX). That in turn gives indications to the spot market and it has become a case of the tail wagging the dog.

The other major oil companies soon followed suit and since then the pipeline spot market has been driving fuel prices up and down. Today’s gasoline prices are based on a “What the market will bear” strategy by the major oil companies. In the 4th quarter of 2008 and 1st quarter of 2009 refineries lost big time money. Some of them, including the Big West refinery in Bakersfield, were forced to close down due to poor economics. This trend will continue as long as the big money investors stay on the sidelines and cause more havoc in the petroleum markets.
Goldman Sachs & Co., Morgan Stanley and other large investors are able to sidestep regulations that limit investments in commodities such as crude oil. They are investing on behalf of pension funds, endowments, hedge funds and other big institutional investors, in part as a hedge against rising inflation. Crude oil investment is used to offset the weaker dollar with the money going back and forth as the world economy continues its slow recovery
A stream of financial deregulation under the Clinton administration, culminated in the Commodity Futures Modernization Act of 2000. These over-the-counter markets are 10 times larger than the futures market with no position limits and almost no regulations to control their investments.
I have now revealed my secrets on the mystery of fuel pricing to you. I hope that the answer is as simple as watching those Saturday morning cartoons in order to learn to speak English.

Bob van der Valk is the Director of US Branded Licensing with 4Refuel Inc. in Lynnwood, Washington and can be contacted at (971) 678-2975 or by email at: tridemoil@aol.com

Bob’s web site address is: www.4vqp.com/ourconsultants/thegasguy.html

Any views expressed in this newsletter are those of the writer, except where the writer specifically states them to be the views of the 4Refuel group of companies.

All We Need to Survive: Water, Food and …….Gasoline!

Dateline: Terry, Montana
June 3, 2009 - 11:30 MST
By: Bob van der Valk

While the market sorted itself out yesterday, I was busy trying to keep from running out of water at the Bob's Big Boy Ranch in Terry, Montana. At one point we not only had our artesian well down but our hard water well had shut down as well. Unexpectedly, we had to make a quick trip and run out to the Terry Super Valu grocery store to stock up on bottled water. We may well be having a similar problem happening right now in the refining and petroleum business.

With crude oil being pumped out of the ground like water, any interruption will cause consumers to look for options to maintain some sense of normalcy. In our case, we almost decided to move back in with our daughter Inger and her family while the repairs were being made. But, what do we do when we run out gasoline? We can't do anything especially when living out in the country where long distances have to be covered by car or truck every day.

The Department of Energy statistics were bearish for diesel and neutral for gasoline today. The wholesale spot market price is down 4 cents per gallon for diesel and no change for gasoline, so far. So far the July WTI crude oil price is down $2.21 to $66.34 a barrel. The Nymex is off for now but there is doubt it will stay down that much at the close of business today with buyers perched to jump in as soon as they sense the low has been reached.

This year it's all about oil refineries being able to keep up with the expected increase in demand of gasoline for the upcoming summer driving season. Petroleum traders will be concentrating on the supply issues with the biggest focus on refinery gasoline output.

This morning's Department of Energy report is the tale of the tape for an upcoming fight between the bulls and the bears in the petroleum market. There are plenty of points to go around supporting both sides of the arguments to reach conclusions that crude prices and therefore gasoline prices may either shoot like a rocket or go back down with a bullet.


President Obama was greeted by Saudi King Abdullah upon landing in the Middle East today. He also received the news that the Saudi Arabian Oil Company Aramco had raised their crude oil prices from $1.05 to $3.25 a barrel for shipments in July 2009. The heavy crude oil is the one at the lowest with the light crude oil selling at the highest price. All of their crude oil prices are ratcheted up or down from the posted Brent crude oil price.

Our water situation will be resolved within a day or two but the current market situation for gasoline prices will continue to play itself out throughout the summer months. Right now the Four Corners gas station in Terry still has plenty of gasoline in the tank but it us 10 cents per gallon more today then it was a week ago.

We better keep the horses saddled up and ready just in case we will need them for back up. There may come a time when I will have start reporting the prices of hay and alfalfa instead of gasoline.

Will Motorists Suffer a Memorial Day Gas Price Hangover?

Dateline: Terry, Montana
By: Bob van der Valk
05-26-2009 10:00 AM MST

The July WTI crude oil price is a basic no change down 21 cents to $61.46 a barrel. The spot market gasoline price is up 1 cent per gallon and diesel no change so far this morning. The average price for regular unleaded gasoline is $2.421 per gallon in the U.S. with the West Coast at $2.667 per gallon.

U.S. motorists were expected to drive a little more this Memorial Day weekend with renewed optimism that the economic slump has hit bottom. Expectations of gasoline use were put at 1.8% higher than Memorial Day last year with the economy in the recovery mode.

The consumer confidence index for May jumped to 54.9 from 40.8 in April 2009. The index is now at its highest since September 2008 based on a graph published by the Confidence Board based on research done by TNS, Taylor Nelson Sofres PLC is the world’s largest custom market research company in 80 countries, shows the following:

Over the weekend we did have some bad news with the possibility that Nigerian violence will cut oil output. ChevronTexaco was forced to cut off about 100K barrels of crude oil supply representing about one fourth of the total output for Nigerian crude oil. Most of that crude oil is destined for U.S. refineries and any interruption in the supply of crude oil will have an immediate impact on prices.

On top of that North Korea successfully set off an underground atomic blast and also fired off a couple of missiles over the weekend. This was in an apparent attempt to prove that they are going to be capable of launching an atomic weapon at any of their enemies.

By far the most positive comment for stability in the immediate future of oil prices was the statement released by the Saudi Arabia oil minister Ali al-Naimi over the weekend. He stated that OPEC will likely stay the course with regards to production cuts at the upcoming meeting this Thursday in Vienna. This was an advance signal for discussions between him and Steven Chu, the U.S. Energy Secretary, to show support their in assisting the economic recovery.

Take a little "Hair of the Dog" if you are having a weekend hangover but keep your gas tanks full as gasoline prices are not expected to come back down before the fall of this year.