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Something's Smelly: Gas Prices Should Soon Reverse

by: Michael Filloon June 13, 2008 | about stocks: UGA    

Michael Filloon

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The current market is all about oil. The bullish nature of this commodity can make things very difficult on the pocket books of United States consumers. Rising inflationary pressures, soon will take a toll on every one in the country.

Even more important were the unemployment numbers that came out on Thursday. For every person that loses their job, that is one less vehicle commuting to and from work everyday. This is very important and makes gasoline a very good buy on the hike upwards yesterday. Gasoline has been following the price of oil on the way up, but it is starting to feel like there may be a top. The summer driving session kicked off this year with an unexpected jump in gasoline inventories and last Wednesday followed with the same type of numbers.

If we look at overall gas pricing and the way it is traded, generally gasoline starts to hit a top in the summer. This may not be a typical year but if you are in for longer than a few months and history repeats itself, you could make some money.

Another strange occurence was the refiners not trading along with the price of gasoline. As a general rule, when gas goes up, refiners go up unless there is a major spike in oil prices. The refiners continued to sell off as traders got a second wind in the afternoon. This decoupling is beginning to show a last stand of gasoline bulls. Since inventories were added during what was suppose to be the busiest travelling weekend of the year, it would stand to reason that other holidays such as the Fourth of July will be the same.

According to Tesoro (TSO), this slowdown started in the beginning of the second half of last year, as shown by their decreased operating income from $917 million in the first half and $50 million in the second. Gasoline demand growth was .5% in the first half and declined to -1.8% on the West Coast last year according to the Department of Energy.

Using California as a gage to where the economy is going, we see that at the end of 2007 U.S. unemployment was 5% while California was approximately 5.9%. As of the end of April of this year California unemployment was up to 6.2%. The Fed Board seems more than happy to let inflation go for a while as they try to protect homeowners, and as long as this happens we will continue to see a lag in gasoline consumption.

Even if the price of oil goes higher on demand from emerging markets, gasoline will decouple from the trade and decrease in price. It seems at this point with the mortgage crisis and the high price of oil, the Fed will continue to do nothing for a while unless there is a major problem within the US market.

Lastly, gasoline inventories drew down with respect to the vacationing season. There are already 41 million less flights this year than last. This time of year, gasoline prices are already close to peaking, so we could see a large decline in the upcoming months as demand wanes further. I would short UGA in anticipation of this.

Disclosure: None

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This article has 6 comments:

  •  
    Jun 13 09:40 AM
    High oil prices and low gasoline prices will lead to supply destruction.
    Reply
  •  
    Jun 14 05:43 AM
    Interesting... However, you fail to include the fact that gasoline has not risen in step with oil, increasing worldwide demand, or the fact that alot of gas stations actually lose money selling gas.

    If gas moved with oil, then gas today could easily cost $5/gal - oil doubled from last year, but gas went from $2.80 to $4. Exxon has decided to sell evey last gas station they own. Why? Because there is no profit in them. China earthquakes, Japan earthquakes, India's exploding middle class, all increase demand.

    We may see short term fluctuations in price, but long term gas will do nothing but go up.
    Reply
  •  
    Jun 14 01:52 PM
    People can't seem to comprehend that oil is highly priced because of increasing demand outside the US but more importantly it cost increasingly more to drill and bring to market oil ,therefore if you want oil you will have to pay drillers the money to get it out of the ground or there won't be any oil . Why is this so hard to understand . The writers of these "oil bubble " articles are completely lost .
    Reply
  •  
    Jun 14 03:39 PM
    Refiners will make money or they will close their doors and the public will not have any gas. That's the bottom line. NO ONE can stay in business losing money. Already, WNR is a real possible bankruptcy candidate. Has anyone stopped to think where their gas will come from if these independent refiners start failing?
    Reply
  •  
    Jun 14 03:50 PM
    The oil companies that pump crude and refine do the refining are making a fortune on the price of oil and don't care about refining. If low gasoline prices drive the independents out of business so much the better. If the price of gasoline goes up too fast folks will stop driving and that will cut into the profits they make on pumping the crude.
    Reply
  •  
    Jun 15 02:16 AM
    US gasoline prices have not been able to truly reflect actual production costs because corn ethanol is not an additive. It is a subsidized replacement for the gasoline used. As corn prices escalate, the pressure will shift from refiners to ethanol producers whose soaring input costs will force them to raise ethanol prices above refining costs. It will then become issue in Congress again.

    The midwest flooding has not yet been fully recognized in the prices of either corn, ethanol, or the other grains. It will be. Go feed your cattle, pigs, chickens, yourselves, whatever, on what?
    Reply
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