I may have overstepped the mark last week when I dropped the Goldman Sachs crystal ball, which exploded and broke into pieces on all of their corporate toes – call it oil’s form of road rage. We have all experienced the lone yahoo who decides to move four lanes over a busy highway, not signaling as he tries to get to the exit he’s known about for 20 kms. All he had to do was look at a map. Similarly, Goldman Sachs, and most other oil stained banker expert types, should look at signs if they want to see the direction of prices.   I use the word “direction” because, not wishing to repeat myself, a call for a two decimal place subjective “forecast” for the price of any commodity is lotterish in credibility without objective facts to back up the guess. Now that I have slammed the investment community how would I come up with direction of crude, diesel and gasoline prices?   My answer: Get out the map and follow the signs or get out the newspaper and read between the lines.

The first exercise is objective, the second instinctively subjective. From an objective position I would look at the weekly EIA data that we summarize every week and these are the ones I am watching right now:

Inventories – crude is fine but gasoline and diesel are at or below the five year average. At this time of year, gasoline is a non-player but if these levels don’t improve by January then prices will spike starting in February. Diesel levels are a concern, as this is the start of the heating season. If we have a sudden cold snap then diesel and heating oil prices will increase even though crude may decrease. If heating oil prices increase so will gasoline in a slipstream effect.

Refinery Runs – at 88.5% of capacity this is rather low for the start of heating season. This may be because of narrow refining margins and flat-to-negative domestic demand for refined product. If the runs aren’t at least at 93% by the end of November, then supply will be low and prices high.  

Rig Counts – the U.S. Exploration and Production Industry needs a NYMEX crude price of $90/bbl and Brent price of $100/bbl to maintain rig counts of 1,500 to 1,600. Any drop below the 1,500 rig base count indicates that the patch is under outside price and or credit pressure due to lower OPEC crude prices.   Taking all three indicators into consideration, my traffic direction for prices is that we may have reached the bottom; especially when you consider that integrated oil companies with full upstream and downstream revenue streams are suffering in the upstream so the downstream, which is the consumer, will now take up the slack with tighter prices for diesel and gasoline.

The subjective and foggy number in the price directions are the 12 misfits of OPEC. I cannot see all members following the Saudis’ lead on maintaining market share by holding the course on crude production.   Just because the Saudis can live with $70 to $80/bbl doesn’t mean that the other players are in the game.   Indeed there may already be cracks in the Cartel.   A key market for Saudi Medium Sour crude is the U.S. Gulf Coast, which is also a target customer for Mexico and Venezuela. Curiously, prior to the November 27 OPEC meeting, the Saudi Oil Minister plans to attend “events” in both Mexico and… you guessed it… Venezuela!   Maybe we’re going to avoid that crude oil price crash – we’ve just got to follow the signs.