There is a lot of discussion making the rounds today concerning oil prices increasing to $150 per barrel or so. In many ways this is similar to the talk moving from 2007 into 2008 – led by analysts at places like Goldman Sachs – right before the recession hit bringing on a plummet in oil prices to the low end of $30.
As noted, many of the analysts in the 2007-2008 run up seemed to have a vested interest in oil prices reaching $200 per barrel. And many of the investors in oil futures driving the price increases were not traditional to the industry. As the housing bubble first started to deflate, there was a rush of institutional investors looking for a safe haven in which to park their money. Sure, China and India and the rest of the industrializing and developing world were applying pressure on traditional supply and demand dynamics. But those dynamics had not changed to the degree prices were rising.
At a time when there was nothing but a rosy view on an unlimited ceiling for oil prices, Fuel Oil News/NPN Magazine contacted Peter Beutel for his take on the reality of super high oil prices as a constant market reality. Beutel is president and founder of Cameron Hanover and chief editor of the firm’s Daily Energy Hedger, and author of “Surviving Energy Prices”. Beutel is quoted by every major wire service and financial publication, including Dow Jones, Associated Press, Reuters, Bloomberg, The Wall Street Journal and others. Prior to starting Cameron Hanover, Peter worked on Wall Street as a research analyst at several major brokerage firms, among them Merrill Lynch and DL &J. He is seen regularly on CNN, CNBC, ABC, CBS, NBC and Bloomberg.
Beutel has a history of being right on the money about the global trends in the price of oil and refined products back to some insightful views he presented in Time Magazine article in 1987 that really panned out in the coming years. In our interview in March 2008, he did not share the optimism of many of his analyst peers towards a new paradigm of eternally high oil prices, and he predicted a serious deflation that would happen sooner rather than later. In that vein, FON/NPN asked Beutel for his views on where prices are at today, and about industry efforts with the New England Fuel Institute and the Petroleum Marketers Association of America to regulate some of the more non-traditional speculatory practices impacting oil prices.
FON: You're seeing prices rise notably and hearing all this talk about $150 a barrel oil when you don't really see any signs of a robust recovery or any huge increases in demand that would be driving those prices? Is there a real-world reason behind these increases?
Beutel: No, there isn't. For the past 13 months prices have been rallying on two or three different things. First, I want you to picture me taking a pail of water and throwing it in a bathtub. Obviously it's going to go down to one end and when it hits that end, it's going to slosh back. That's what happened when prices dropped from $147 to $32.70. You went from end into the bathtub and now you are in the slosh back. How high can the slosh back go? Traditional theory would say somewhere between $90 and $103, but we haven't done that yet and we may not do that.
The interesting thing is the prices have also risen on the dollar weakening even when it's been strengthening – so if you have three days higher and the fourth is lower, it will rally on that fourth day. And it's been rallying on higher equities and on the start of a world economic recovery.
But we have plenty of supplies – gasoline stocks near 17-year highs; crude oil stocks plentiful; distillate stocks (fuel oil and diesel) plentiful; and demand not doing anything special. And over the last few days (as of April 10) we've seen the market selloff, and it has not been able to make new highs despite having some help from equities – the stock market broke 11,000 and we had the dollar dramatically weak due to the Greek rescue package and yet the market did not go higher. That makes the next few reports very important because if we don't see the group that has pushed this market higher – not speculators but investors – if they don't push it higher it is very possible we will see another sell off similar, but certainly not as dramatic, as the last one. I could see a move that could give us a $20 or $25 drop if we do not find a way to move higher in the next few weeks.
FON: With all of the new economic territory, we are in with the recession combined with traditional issues like Middle East political volatility, what type of market behavior can we expect in general over the next couple of years?
Beutel: I think chaos will be one of the watch words. At this point I think we may be about to start another trend. What's going to happen over the next two years or so – you can expect some big trends in both directions. I'm not sure which trend we have next – another $20 higher or a $20 to $25 sell off and then a reassessment. But, I do believe we are going to see more of the type of volatility that is so oil-market related where you get these moves that can last for a while. I don't think we are going to see these tempests in a teapot where we get these moves we've had lately where it's $3 up, $4 down, $2 down, $4 up... that kind of thing.
The thing about the oil markets is that they prefer to trend. They prefer these big moves up and down rather than a lot of moves where it is up or down within a range. Right now, over the past few weeks, we've been moving sideways to higher – making new highs, but not really doing it with any authority. So we are kind of at a critical point. The momentum is still higher, but it's lost a step. It is possible that we are about to start a major move down though we do not at this point have confirmation of that, so I’d be premature to say that it is going to happen. But it's a possibility that was not there a month ago. If we do continue higher and the economy strengthens and we do see the market start going back up every time the equities go higher or we get a piece of bullish news on the economy or the dollar drops – if we get all of those in sync again then it is possible we could break $100, though I do think it will be difficult to get much higher than that.
FON: What can we expect relative to heating oil from a price standpoint as we go into the next heating season?
Beutel: Of course, the best time to buy is in the first two weeks of March and this March proved to be no exception as it was a great time to buy for the coming winter. And it has been something like 24 out of 29 winters. The second best time to buy is right around Independence Day so we can take a look around that time.
FON: We have been lucky, particularly in the fuel oil industry sector downstream, that we are enjoying a bit of a price break. The prices we saw in 2008 were brutal – borderline terminal.
Beutel: The industry has been through it and it has been very tough and a lot of people blame their heating oil distributors for the higher prices when it is nowhere near their fault. They are just trying to make a few cents on delivering it and trying to be available on Christmas Eve and New Years Eve and they do a lot of good service, and it's a shame they get caught up in this because they certainly do not deserve this.
FON: Earlier we touched on the difference between investor and speculator and the industry, through the Petroleum Marketers Association of America and the New England Fuel Institute, has been working to address some of the speculatory pressures. What is your take on these efforts?
I should tell you off the bat I have been working with NEFI and PMAA on the issue and I agree with them. I feel that normal speculation is fine, but what I feel that there needs to be an acid test for speculators. My acid test is that if you have taken short positions commensurate with the long positions you have taken over a six-month, 12-month, 18-month or 24-month period then that's not a problem. But I do have a bit of a problem with some of the people who just buy it and hold it because I think in a lot of cases they could accomplish the same thing by buying (stock) in a major oil company with oil in the ground. And the result would not raise the price for motorists, or home heating oil distributors and their customer, or farmers or airlines – the list goes on and on. For years investors used to say, “I'm bullish on oil – let me buy one of the large integrated oil companies with oil in the ground.” And about three years ago somebody came up with the bright idea to just buy the futures, and futures had never been considered something that anybody would consider as an investment. We used to joke around when someone had a child and say, “Yeah, we'll put a crude oil contact in the child's college fund because that would be the worst thing that anybody would ever do.” And I still ultimately believe that investing in oil is not a smart decision.
I feel bad for someone that bought oil at $125 and then watched it drop to $33. That's not something I consider an investment.
Investors are much happier with something they can buy at $30 and watch it go to $40 and maybe it drops back to $35 and rebounds gain to $45 and over 100 years it eventually gets to $400 and it's an investment. That’s always been my understanding of investments and maybe every 50 years you get a big correction. But something that can go from $17 in 2002 to $78 in 2006 then back down to $50 then back up to $147 in 2008 then back down to $32.70 within the same year and now is back at $75 – that is not what I would call an investment. And not only are the people investing in oil not doing themselves a favor, I don't think they are doing people who use oil any favors. Again, if people want to buy it and sell it equally – if they want to sell what they don't have and speculate it – then God bless them and I think that’s legitimate. But I'm against the idea of only buying something, only holding it and then regurgitating it in massive quantities the way we have been since 2008.
FON: This continuation of looking on oil as an investment seems surprising, since one would imagine that an awful lot of people were seriously burned in 2008 by the price collapse.
Beutel: Just about everybody got hurt. People who hedged it at $100 – producers who sold into it at $100 – had margin calls up to $147 so some of them got hurt. And people who hedged it at $125 and looked brilliant at $147saw it melt away and looked like buffoons at $35. People who were trying to decide whether or not to buy and drill lands might have looked great when they bought it at $100 and it went to $147, and then they got scare when it went back to $100 and felt horrible when it went to $50. It skewed the entire use/production cycle and probably threw it out of kilter for the next 10 years and that is really not something we need.
We had not seen moves that big – yes, we had seen some big moves, some howlers, but nothing like the move to $147 then back to $32.70 and that was I think a condition of people buying and holding. They buy the way fraternity boys drink. They go gulp, gulp, gulp, gulp then they regurgitate it very rapidly and that is exactly what happened. It took a year-and-a-half to buy it up to $147 then it took six months for it to get down to $32.70. And what that did to people's drilling and production I could write a book on.
A lot of end users and producers don't mind some wiggle and jiggle, but we just don't need to see these moves that price entire sectors out of the market and then destroy the drilling that was based upon those prices six months later. How do you make any intelligent decisions that way? Fine, we got to $41.15 in October of 1990 and then we got back down to $10.35 in 1998, but it took us eight years to cut it by a quarter.
FON: It's the type of thing too, as you touched on, that can have a severe impact on our overall economy.
Beutel: I will swear up and down, it was the extra $1.5 trillion we spent on energy in the first seven years of the 21st Century compared to the last seven years of the 20th that put us in this recession. Because I don't know how you take $1.5 trillion out of consumers and businesses without it having an impact on society. But I'm petro-centric so people expect that from me.