One on One With Bill O`Grady of A.G. Edwards
Wednesday, August 23, 2006
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SUSIE GHARIB: A surprise for energy traders today: new government figures show gasoline inventories rose last week and crude supplies fell a smaller than expected amount. Both of those factors sent prices falling with light sweet crude for October delivery closing off $1.34 to $71.76. The Energy Department said gasoline stockpiles rose by 400,000 barrels last week when a drop had been expected. At the same time, crude inventories were off just 600,000 barrels, instead of the draw of 1.2 million barrels that had been projected. Joining us now for more analysis of those oil numbers and the outlook, Bill O`Grady, assistant director of market analysis at AG Edwards. Hi Bill. BILL O`GRADY, ASSISTANT DIRECTOR OF MARKET ANALYSIS, AG EDWARDS: Hello, Susie.
GHARIB: That was a pretty dramatic gain in gasoline inventories today. Is this the beginning of a trend, perhaps?
O`GRADY: Probably not. We probably still have at least two or three more weeks of declines. But any time you get a decline -- or a bill this time of year, it`s extraordinarily unusual and raise I thin some concerns among traders that they`re not going to be able to rely on gasoline much longer to keep the market higher
GHARIB: Well, you`re right. August isn`t the time that you usually expect to see gasoline inventories rising with the driving season and all of that. Do you see any kind of fundamental changes that are going on in supplies and demand?
GHARIB: Well in demand usually when gasoline prices have gotten to that magic $3 level at the pump, we see a slowdown in consumption. It really hasn`t happened this time. Gasoline consumption usually rises about 1.5 to 2 percent based upon normal growth and population expansion. And that`s exactly what we`re seeing on a four-week moving average basis compared to the same four weeks a year ago. We`re up about 1.7 percent. The difference this time around, though, is that refineries that had been damaged by hurricane Katrina and Rita were slow to respond and because of that, the refinery runs were slow to pick up. We`re starting to see that pick up now which is bringing on more gasoline supply.
GHARIB: You know, Bill, oil prices have been all over the place this week. On Monday we reported that oil prices were up more than a dollar over concerns about the Iranian stance on this nuclear program and then today down more than a dollar because of these inventory numbers. Is this the way of life that it`s going to be in the oil market, very event driven?
O`GRADY: Susie, sadly I think that`s exactly what we`re heading toward. Oil has always been unique as a commodity because for most of the past 75 years, we`ve had an actively functioning cartel that has kept prices a little higher than they otherwise would have been, but also had this excess supply cushion that could dampen both the drops and the increases. Now that that supply cushion has been pretty much evaporated, we are now in a situation where things that drive up demand or increase the fears of traders and consumers drive prices up sharply and things that actually reduce consumption have just the opposite effect. So not only are we looking at the possibility of much higher prices, I know if we get a geopolitical event from Iran, for example, we`re also looking at the potential for much lower prices if we see a slowdown in world economic growth. GHARIB: We`ve heard from a number of oil analysts who have forecasted that oil could get down to the $65 a barrel and there are other oil analysts who say there`s a good chance it could get to $100. In fact one of your colleagues at AG Edwards, an energy analyst, has said that a certain event could trigger $100 on oil. What`s your forecast?
O`GRADY: Well, again, a lot of this is difficult to forecast because you`re trying to figure out, you know, what next geopolitical event is going to stumble into the market and affect supply. But if we avoid a major blow-up in the Middle East and that`s a pretty significant if, it looks to me like the world economy is slowing down. The housing numbers that you mentioned at the top of your broadcast are indications, strong indications that the U.S. economy is probably slowing. This week we`ve got numbers from Germany suggesting the same thing about investor sentiment. If we start to see a slowdown in world growth, that is going to put pressure on consumption and tend to bring a decline in price. So really what we`re looking at here now is a race between potential geopolitical events and slowing world growth. I tend to believe it`s going to be mostly slowing world growth, though.
GHARIB: We`ll see how that race (ph) plays out. Thank you, Bill meanwhile. Thank you for coming on the program.
O`GRADY: Thanks for having me Susie.
GHARIB: We`ve been speaking with Bill O`Grady of AG Edwards.
