29-09-06

Oil had energy investors reaching for the Tums the last few weeks. After crude tagged a record intra-day high of $ 78.40 on July 14, it drifted lower through the end of summer and on August 29 closed below $ 70 for the first time since June 20. On September 4, the sell-off accelerated: WTI closed at $ 68.60 and continued falling, finally bottoming below $ 61, a price that hadn't been seen since March 10.
Along the way, it helped pull the TSX Venture Exchange -- which tends to live and die at the hands of energy and resource stocks -- down more than 10 %.

So, what happened? Mainstream financial media blamed crude's tumble on everything from Iran playing nice with the US to a so far hurricane-less hurricane season in the US Gulf of Mexico. But any intelligent observer can see that the fall was too hard and too sudden to be caused by these factors alone.
More than anything, this sell-off looked like it was caused by seasonal and technical factors. Crude is almost always weak in the fourth quarter, and the price had gotten ahead of itself in recent months -- not surprising, given Israel and Lebanon going to toe-to-toe.

But the timing of oil's decline also coincides with another event: US mid-term elections. Although these two things sound unrelated, oil and politics in fact go hand in hand. In fact, there is an eye-opening correlation between US President George Bush's popularity and American gasoline prices over the past four years. The higher the price at the pump, the more people think of Bush as a chump.
Which begs the question: with elections looming, might the Republicans be trying to bring down oil prices (and therefore gasoline costs) in an attempt to cull favour at the polls?

While we're generally sceptical of conspiracy theories (after all, if the government can't deliver mail on time, how could it organize a large-scale covert action?), it's a known fact that the feds have several mechanisms by which they could nudge crude lower. The Strategic Petroleum Reserve, for one. Release of crude from this stockpile helped push oil prices lower last fall in the wake of hurricanes Katrina and Rita.
Another lesser-known influence on oil prices is the "crack spread." This is the difference between the price that oil refiners pay for crude and the price they receive for the gasoline they produce. Put another way, it's the profit margin that refiners make on their products.

Currently, the crack spread is at -- in the words of the US Energy Information Administration -- "unusually low levels." This means that refiners are selling gasoline for little more than the cost of the oil they purchase. This makes no sense from a business perspective... generally in such a situation, refiners would simply up the sales price of their gasoline, improving their margins. However, it does make sense if the refiners are purposely attempting to keep a lid on prices.
Why would these companies voluntarily take lower profits? There's no way to know for sure, but it's a certainty that the White House and Big Oil are close friends.

Witness Dick Cheney's ties to Halliburton, and George Bush's background in the Texas oil patch. Might the Republicans be calling in a favour from their refinery manager pals, asking them to keep gas prices down until November 7 has passed?
Of course, there's no way to prove this. But for energy investors, it's worth considering. If gasoline prices are being artificially depressed, we can expect a rebound during the last few weeks of the year. Which -- judging from the historical relationship between gasoline and crude -- would lift oil prices, and therefore oil stocks.