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0 Sep 12 2014 @ 6:00am by Matt Smith in Crude Oil, Global Energy

It’s Good to be Bad

Not meaning to be villainous – like my British counterparts in the Jaguar commercial – but it would seem that sometimes ‘it’s good to be bad‘. And here are some immediate examples across commodityland™.

The first topic we are going to look at in dastardly detail is retail gasoline prices. Prices generally peak in the first half of the year ahead of driving season. We then take the exit ramp from this period when we pass Labor Day, and demand takes a turn for the worse.

A combination of record refining this summer (taking advantage of lower domestic crude prices), tepid gasoline demand (helping to keep stockpiles plentiful), and a recent easing in global crude benchmarks (on a stronger dollar, weaker economic data, tempered global oil demand growth and improving supply) have all contributed to retail gasoline prices dropping by nearly 30 cents (7%) from the summer highs of $3.70/gal.

Further downside should continue, as is the seasonal trend as we head toward the end of the year (hark, see below),while supportive profit margins should deter refinery maintenance season from being too harsh. On this basis, last year’s low in December at $3.20/gal is a destination we should speed straight past:

Why is this good? Because of the one-penny-to-one-billion spending rule. The rule of thumb is that a one-penny change in the price of gasoline leads to a $1 billion increase in household consumption on an annualized basis. As the below chart illustrates, gasoline accounts for $2,500 of household spending each year. As retail gasoline prices reach their lowest level for the time of year since 2010, lower prices await. Hurrah!

Moving on to round two of this rogue regaling, this good-to-be-bad example comes courtesy of Russia. For the Russian ruble has been gradually depreciating throughout this year amid rising geopolitical tension in Ukraine. It has now dropped 12% versus the US dollar in 2014.

Yet while a falling ruble hurts Russian imports (as they become increasingly more expensive to buy), Russia reaps the rewards when it comes to exports. And it is seeing the greatest benefit from its largest export: oil. (to the tune of 7 million barrels a day).

Hence, while crude prices in US dollars have dropped 12% in value since the beginning of July, crude oil in rubles has only dropped 3.4%. For Russian coffers, it is good for the ruble to be bad:

The third and final round of disagreeable data comes courtesy of United Kingdom (UK) oil production. The fact that UK oil production is tanking so much could be economically crippling for an independent Scotland. Oil production has dropped 40% from 2010 to 2013, and the likelihood of ongoing falling flows means that Scotland would struggle to be an oil-financed welfare state – unless considerable technological developments were made, or oil prices were to spike to incentivize higher-cost production.

For those who wish Scotland to remain part of the UK, this badly weakening source of revenue is one of the better arguments to deter them from exiting.

Once again, thanks for playing! Wherever you are in the world, keep an eye on the developments mentioned in this post – from US gasoline to Russian rubles to UK oil production……..commodityland™ is never dull!

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