Crude oil futures reached yet another record high of $65 a barrel yesterday, and in early trading this morning the bull kept on rolling. Skeptics who thought oil couldn’t climb this far, this fast have been understandably quiet of late. But for all the talk of a secular rise in energy prices, one could wonder why the current rally hasn’t corrected. Indeed, we may very well be in the middle of a secular bull market for energy, but the ebb and flow of trading hasn’t yet been relegated to the dust bin of history.

Let’s start with yesterday’s weekly petroleum report from the Energy Information Administration, a release that showed that U.S. commercial inventories of crude (excluding the Strategic Petroleum Reserve) continue to move higher. For the week through August 5, crude oil stocks advanced 0.9%, and over the past year through that date they’re up 9.7%. At 320.8 million barrels, EIA observes, “U.S. crude inventories are well above the upper end of the average range for this time of year.”
If oil inventories continue to increase, why hasn’t the price of oil pulled back? One reason, as the Centre for Global Energy Studies has recently noted, is that rising inventories are at odds with a lack of spare oil production capacity in the world. Most of the globe’s spare production capacity resides within Opec, and within the cartel much of that spare capacity is found in Saudi Arabia. But the kingdom’s ability to ramp up production from current levels is constrained, at least in the short term, giving rise to bull market in oil’s price. “Stocks have built rapidly in the first half of 2005, despite $60 oil,” according to a new report from the International Energy Agency reports the London Times, “but clearly, the market verdict remains that more inventories are needed until investment responses catch up and demand patterns are clearer.”
Bumping up against a wall is also the story when it comes to manufacturing gasoline in America, where new refinery development has remained the stuff of dreams for two decades. In the U.S., refineries operated at 95% capacity last week, the EIA reports. Meanwhile, gasoline demand keeps rising, the agency notes. For the week ending August 5, gasoline demand was 9.483 million barrels per day, up slightly from 9.472 million barrels a day a year earlier.
It’s also true that gasoline inventories fell last week for the sixth week in a row. That lends momentum to the fact that this is the peak season for gasoline demand, courtesy of summer driving, a fact that hasn’t been lost on traders. In fact, gasoline, measured by the near-term futures contract traded on the New York Mercantile Exchange, has run up more than oil. Gasoline prices climbed more than 60% this year through yesterday vs. 53% for oil.
The incentives for elevating oil inventories further, in short, remain high. But that’s where oil and gasoline part company. Crude oil is an unrefined product that’s pumped from the ground; gasoline is manufactured and therefore subject to the constraints of refinery capacity, of which a thin 5% spare capacity exists in the U.S.
In theory, gasoline demand will remain high through the Labor Day weekend, the unofficial end of summer and the driving season. But if history’s a guide, demand will soften from September through March, as EIA data show to be the case in recent years. It’s worth noting too that gasoline prices, while generally climbing since late-2001, have for the past two years suffered a sharp downturn in late summer (August 2003) and early fall (October 2004). Oil too has shown a tendency to pull back around the same time, declining in late-August and early September in both 2003 and 2004.
As Mark Twain long ago advised, history doesn’t repeat itself, but sometimes it rhymes. Exactly when and where those rhymes come is anyone’s guess. But with gasoline and oil prices running higher in virtually unbroken lines, it may be time to reconsider the omnipresent concepts of greed and fear from a tactical perspective.