Commentary by Eric Wilder –

Even though Americans are complaining vociferously about the price of gasoline at the pump, they have not as yet spoken with their pocket books.  This is seen in the still strong demand for gas, up almost 1% since this time one year ago.

 

Crude oil briefly exceeded $74 per barrel today, partly because of the upcoming Fourth of July holiday when many motorists take extended car trips.  After reaching $74.15 per barrel, crude settled at $73.93 on the New York Mercantile Exchange.  $73 per barrel was thought to be the barrier traders would not pierce.  Now that this barrier is penetrated, prices could float much higher.

 

American motorists seem comfortable paying nearly $3 per gallon for gasoline.  We have yet to see the price per gallon limit where motorists blink and cut back their driving habits, effectively lowering demand.  I predict that price is $5 per gallon, a limit we won’t reach until a barrel of Texas Sweet trades for well over $100 per barrel.

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Eric Wilder will host a book signing at Emerson Biggin’s in Oklahoma City on June 26 at 6:30 pm.  The public, and all of Eric’s friends are invited.  Emerson Biggin’s is located on Memorial Road just east of Western Avenue.  http://www.ericwilder.com  http://www.justeastofeden.blogharbor.com  http://ericwilder.blogspot.com

Commentary by Eric Wilder - At a recent meeting of independent oil producers, Boone Pickens predicted that we would see $80 a barrel for crude oil before the end of the year. He also predicted that natural gas would soon fall to around $4 per thousand cubic feet.

What do I think of his prediction? He is correct that the world’s daily production of crude oil has remained static at 85 million barrels for quite some time. This is in the face of rising demand, mostly from China. Yes, there is a world of oil shale and heavy, asphaltic oil but it is hard to extract and refine. We can use it, but at a much higher price than what we are paying now.

I agree with Boone in part of his prediction. The price of crude oil is not likely to drop. The opposite, in fact, is likely. Unlike Boone, I don’t think natural gas will drop to $4 per MCF. Why? Natural gas and crude oil are both fossil fuels. They both have BTU factors and, thus, are inexorably linked.

Historically, the connection between an MCF of natural gas and a barrel of oil is 6 to 1. In other words, the cost of 6 MCF of natural gas has historically equaled the cost of 1 barrel of oil. If this were the case now - at a price for crude oil around $70 per barrel - an MCF of natural gas should be selling for $11.67. It closed today for less than $7 per MCF.

The reason for the disparity? Too much natural presently in storage. As of the week ending June 2, this country had more than 2.3 trillion cubic feet of natural in storage, 400 billion cubic feet of natural gas more than during the same period last year, and 800 billion cubic feet of natural gas more than the past 5 year average.

Despite the present abundance of natural gas in storage, it is already selling at the relatively bargain price of almost $5 per MCF below what it historically should. Will it drop to $4 per MCF? Maybe, but I predict that if it does, it will cause such a feeding frenzy among the traders that the price will rapidly rebound, probably to quite a bit more than it is now. Hey, and the 2006 hurricane season just began this month.

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The first oil well drilled in Oklahoma was the Nellie Johnstone #1.  The year was 1897, fully ten years before Oklahoma achieved statehood.  http://www.ericwilder.com http://justeastofeden.blogharbor.com