Lull Before the Storm for Gasoline Prices

Right now there is a tropical depression that is slowly becoming a storm and will then turn into a full fledged hurricane. Of course, I am referring to what is happening with gasoline pump prices.

The average price of gasoline over the last seven days has not changed precipitously, but that is quickly changing on the oil market weather map. The AAA fuel gauge report shows the national average price of self-serve regular gas was $2.613 per gallon last Friday, down just over a penny from a week ago. The national average price of diesel fuel is $2.697 a gallon, up just over a penny.

For much of 2009, crude oil prices have gone steadily upward from the low $30s to the middle $70s. Meanwhile pump prices have increased nationwide from $1.50 to $2.60 per gallon. At 42 gallons to a barrel of crude, each $10 represents about 25 cents per gallon increase or decrease for gasoline. But the market has reacted to the current recession just the opposite of traditional supply and demand dynamics. Instead of gasoline prices staying steady, they went up while the US and Canadian economies were going through their doldrums.

About 50% of the trades on the Nymex and ICE exchanges represent entities who will not take the delivery of one wet barrel of crude oil or fuel when their contracts expire. That is down from 55% at the same time last year before the crude oil price bubble burst. However, it is still higher than the 20% of traders holding paper barrels in 2000. That year is significant because that is when the CTFC took volume requirement off traders dealing on international exchanges. Speculators did what speculators do best and figured out a way to game the system in order to make money.

The big boys are now investing huge amounts of money on the US dollar as a hedge against inflation as well as flow money into the commodities markets, which has served as the primary driver of oil prices.

Gasoline prices are highest in Hawaii, at $3.297 a gallon, and cheapest in South Carolina, at $2.38 a gallon. California meanwhile has remained stable during the week, averaging $3.046 a gallon.

The Labor Day weekend is just a week away and the spot market prices for gasoline have already firmed up. That will translate into higher prices at the gas pump at least until the middle of September. By then the hurricane season for gasoline prices will come to an end when oil companies start switching to refining winter grade gasoline. The supply of gasoline and diesel will increase by 10% and pump prices will ease back down to $2 per gallon by Thanksgiving and crude oil to the $40's.

Disclosure: The author does not have investments in any commodities or equities.

Comments

[cfg3450:]

40$ oil before Christmas -- probably not...

Aug 31 12:36 PM

[notsosmart:]

does anybody really know whats going on with oil & gas? this & other sites have such diverse opinions by so called experts that i wonder if anybody really knows anything or is it all calculated guess work?

Aug 31 02:11 PM

[Larry House:]

Interesting call. We will see. I doubt oil will get that low, but I will be watching with great interest as I am long oil and gas stocks.

Aug 31 05:09 PM

[LKofEnglish:]

this is actually the first bearish case for oil that's made sense to me all year. somebody is going to right here and somebody is going to be wrong because like our political climate there ain't no room in the center for this trade. the reason for the price rise has been made abundantly clear: collapsing dollar, political collapse in Washington, war without wend that still must be funded. The cold weather's coming so gas prices are going to decline? what the hell, right?

Aug 31 09:19 PM

[Bob van der...:]

My professional experience, which continues to this day, has all been in the refining and marketing end of the petroleum business for almost 50 years serving in various management capacities. That includes a stint as the pricing manager for Unocal Corp. in the 70's during which time I learned about the ins and outs of fuel pricing. I have written about those methods in previous articles for Seeking Alpha.

I have learned that the petroleum business runs in cycles during my time in the industry. We are currently in a down cycle but that will change as soon as our economy fully recovers.

Sep 01 06:25 AM

[zenfarmer:]

Does this factor in the massive QE on the part of the FRB? The value of the USD has got to begin reflecting this at some point. Its scale is unprecedented and in that sense we have got to be in unchartered territory with regard to commodity pricing. Otherwise your points make a lot of sense.

Sep 01 02:33 PM