Prepare for a Drop in Diesel and Gasoline Prices

Includes: CME, MA, NMX, OIL
by: Bob van der Valk

You will soon be paying under $2 per gallon again for gasoline and diesel fuel and crude oil will go back down into the 40's. So you can make plans for that trip to see the grandparents for the holidays as well as give the economy a much needed boost. Demand for gasoline in the United States typically falls after Labor Day due to the end of the vacation season. For the week ending September 4, 2009, demand for gasoline was at its lowest point since January 9, 2008, according to MasterCard Advisors LLC.

Currently diesel fuel is cheaper than gasoline in Canada and vice versa in the US. Canadian truckers, who were paying $1.45 per litre in June 2008, are now just paying 92.5 cents in the first week of September per the M.J. Ervin & Associates weekly petroleum prices survey. That’s a whopping 36% savings in 15 months.

Gasoline prices also dropped drastically in the same time period from $1.35 per litre from June last year to .994 cents per litre in the first week of September 2009. That is complete reversal from paying 10 cents per litre more for diesel to paying almost 7 cents per litre more for gasoline last week.

The inversion in diesel fuel versus gasoline prices has not been the case in the United States since the Rita and Katrina hurricanes hit the Gulf Coast in August 2005. That event had a major long term impact on inventories of gasoline, distillates and lube stocks on both side of the border. About 25% of the U.S. refinery capacity is located on the Gulf and was severely affected by the weather phenomenon.

According to Statistics Canada, in July 2009, six of the seven major petroleum products posted declines compared with the same month a year earlier. The decrease in total product sales was led by diesel fuel, down 314.7 thousand cubic metres (-12.5%). Motor gasoline was the only product in the major petroleum product group to post higher sales, up 158.9 thousand cubic metres (+4.3%) from July 2008, and the fifth consecutive month-over-month increase in motor gasoline sales.

Meanwhile that difference in prices has not yet occurred in the U.S per the AAA fuel gauge report as of September 15, 2009:

**E85 MPG/BTU adjusted price
Current Avg.
Yesterday Avg.
Week Ago Avg.
Month Ago Avg.
Year Ago Avg.

Money has been poured into the commodities markets recently as the U.S. dollar fell against the Euro. Crude oil prices have risen from a low of $33 to $72 a barrel last week.

For months, investors have used crude oil as their hedge against inflation, betting that oil prices will likely increase as the economy improves and global supplies start to shrink.

So far 2009 has turned into the first normal year for the petroleum markets since 2004 due to the absence of the high roller speculators and adverse weather conditions. Those investors were burned in the big oil price free fall during the second half of 2008 by following bad advice from their investment brokers.

In August 2009 the U.S. Security and Exchange Commission took initial steps to enforce the strict limitations on dealings between bankers and stock analysts. The law requires investment firms to engage in “fair dealings with customers” and prohibits in-house analysts from issuing opinions and research reports that are at odds with their true beliefs about the market. These opinions are spread fast, far and wide utilizing today’s high tech communications.

The market is also very nervous after news that the Chicago Mercantile Exchange (NASDAQ:CME) Group, which runs the New York Mercantile Exchange (NYMEX), notified traders and brokers of tighter enforcement of existing position limits on NYMEX, CME, and other exchanges as of September 14, 2009.

US oil refiners, who were producing diesel in record numbers last year, reversed course earlier this year and made their refining stream fall in line with the flat demand for gasoline and the ever shrinking demand for diesel fuel. Refinery runs have drifted down to 86.94% of capacity from the previous week's 87.2%. Inventories of crude oil and its finished products are at all time high.

That will have the affect of starting the downward slide for gasoline and diesel fuel prices with the price of crude oil following right along.

Disclosure: The writer does not have any investment or commodities