What's Driving Oil and Gas Prices?

Crude oil jumped over $2 per barrel in New York on Wednesday. A couple of reasons why…

Saudi Arabia and Iran – the two biggest producers in OPEC – are enforcing recent cuts. Saudi Arabia already told Asian clients it is reducing November supplies, and on Wednesday, an Iranian official said Iran informed customers it was cutting supplies by 176,000 barrels per day (bpd) in November.

US crude inventories dropped by 3.3 million barrels in the most recent measure. The forecast was for a 2.6 million barrel increase. Whoops!

Distillate stocks – including heating oil – dropped by 1.4 million barrels, steeper than the 1.1 million barrel drop that was forecast.

There’s also the demand side. Consumers have short memories, and with prices at the pump going down, sales of large SUVs and trucks are shifting into higher gear. Sales of fuel-hogs like the Ford F-150, Jeep Grand Cherokee, and Chevrolet Suburban are rising, not falling.

Heck, through the end of August, HUMMER global sales grew by 62.6%

These are all good reasons. But let’s talk about the reasons normally relegated to tinfoil hat territory.

• - Bush backed off tough talk against Iran. This lowered the geopolitical risk premium in oil.
• - Big Oil imported tankers of gasoline from Europe for fall arrival. On July 23, daily imports peaked at a record 11.324 million barrels. During the previous summer, imports averaged around 9.5 million barrels a day. Why would they do that? Maybe because big oil receives more than $5 billion in tax breaks and other credits. Maybe they don’t want windfall taxes. Maybe they don’t want to have to testify before Congress under oath about their secret meetings with Vice President Cheney, rather than lying bald-faced to legislators.
• - Purchases for the Strategic Petroleum Reserve were postponed until after the election. This is weird, but true. The government released 18 million barrels from the SPR to deal with the aftermath of Katrina. It has dragged its feet on refilling the SPR. I guess the risk of terror attacks on our energy infrastructure must be very low, eh?

These are all obvious ways in which the price of oil could be manipulated lower. Why would anyone bother to manipulate the price of oil lower? According to a recent study, there's a 78% correlation between the direction of gas prices and approval for the GOP.

Maybe this is why 42% of Americans think gas prices have been rigged to influence the election.

And on the flip side, if oil prices can be manipulated lower, that would also mean oil prices can be manipulated higher.

One piece of tinfoil theory I don’t agree with: Some people point to the fact that Goldman Sachs – which provided the new Treasury Secretary --slashed the weighting of gas in its commodities index from 8.45% to 2.30% in July. The theory goes that investors and hedge funds tracking the GSCI dumped long positions in gasoline, sending it lower. But as Econbrowser points out, “between July 12 (when Winter says Goldman Sachs announced the change) and August 7, gasoline futures prices did not fall, but instead rose by 3%.”

And to be fair, Econbrowser does not believe oil and gas prices are being manipulated at all. But I think Econbrowser falls into the all-or-nothing trap. To quote again from this excellent site, “To salvage the theory, you'd have to take the view that both oil and gasoline prices have nothing to do with fundamentals, but instead are entirely determined by the market psychology of speculators.”

That’s not my view at all. My view is that there are strong fundamental drivers in the big trends of oil and oil products, but psychological factors can have a lot to do with short-term trends. I don’t think that’s tinfoil hat territory at all.

Now, maybe it’s all just a big coincidence that imports zoomed at the same time that President Bush backed off on his “let’s bomb Iran” talk, and there were very good reasons not to refill the SPR. We’re still left with the fundamental fact that lower gasoline prices are lighting a fire under the sale of big SUVs and pickup trucks. And that is a very bullish trend indeed.

Is it time to add select oil stocks? They’ve certainly been beaten up enough. I bet you could find some bargains. Just do your due diligence.

After all, which way do you think oil and gas prices will go after the November election?

Check out my new gold and energy blog at MoneyAndMarkets.com