According to the AAA Fuel Gauge report, gasoline prices are now roughly 24.5 cents below where they were a year ago, and 11.5 cents per gallon below where they were a month ago. In spite of this decline in prices, gasoline consumption in the U.S. -as reported by the EIA Weekly Petroleum Status Report- has only increased by 3.2% in the past year, and remains below the 9000 barrel per day threshold. I discussed several prevailing demographic trends that led to this change in a prior article. One of the critical factors forcing down gasoline prices is competition among major refiners and retailers for consumer dollars. Gasoline is an easily substituted commodity and gaining market share is largely a product of being able to secure the best retail locations, and being able to offer the lowest price per gallon of gas. Recently Exxon boosted their production to try to recoup losses related to weak gasoline demand. As oil refiners become more competitive in trying to gain market share, consumers are likely to see lower gasoline prices heading into the Thanksgiving to Christmas shopping season.
When real wages for average consumers are stagnant, economic growth in one sector often has to come from declining sales in another. As declining gasoline demand leads to oil refiners and retailers competing by the only real means available to them -increasing service points and dropping prices. As they become more competitive they actually accelerate the rate of decline in the total number of dollars they are competing for. The likely beneficiary of those lower gasoline prices during the Holiday shopping season will be shopping mall retailers, who will see a bump in this years versus last years sales correlating to the year over year decline in gasoline prices.
Here's a quick and dirty calculation for the projected increase in retail sales: figures for this equation may be drawn from the Products Supplied and Prices tables from the Highlights abstract of the EIA Weekly Petroleum Status Report;
- Average gasoline consumption in barrels per day = g
- Average price of a gallon of 87 octane unleaded = p
The addition of an apostrophe " ' ", implies figures that are from last year, while variables without an apostrophe are meant to indicate the current year.
The Transfer Rate - the percentage of savings on reduced gasoline expenditures one expects to be transferred directly to increased Holiday Retail spending is represented by t. What that transfer rate will be is largely based on the economic and political outlook of the person doing the figuring.
Increased economy wide Holiday spending equals s x 42 (42 being the number of gallons in a petroleum barrel).
So we get t(t'p' - gp) = s, and 42s equals increased economy wide holiday spending.
This equation also works when gasoline prices are higher than the previous year, in which case s becomes a negative value and t is automatically assumed to equal 1.
Using this calculation on a weekly basis as new EIA reports become available can give one a rough idea of how hard to short oil refiners and retailers stocks, and how much to move into consumer goods retail stocks over this holiday season.
The reason this type of calculation is becoming useful is the recent announcement cited above, that Exxon (NYSE:XOM) has boosted production in hopes of off-setting a slump in refining margins. As I mentioned in my Convergence and Decline of Brent and WTI Oil Futures article, as U.S. oil refiners and retailers try to boost margins by exporting finished gasoline and diesel to foreign markets, demand for crude from other world suppliers will diminish, causing downward pressure on Brent North Sea Crude prices. As the Brent price falls and Brent and WTI crude prices converge, the economic advantage associated with exporting finished gasoline and diesel to foreign markets is diminished, which forces U.S. oil refiners and retailers to compete more aggressively in both domestic and foreign markets. Failure to compete aggressively for greater market share will lead to disappointed investors, and calls for the ouster of oil industry executives.
There's no question that a squeeze on oil refiners and retailers could lead to increased sales for consumer goods retailers during the 2013 Thanksgiving to Christmas shopping season. One can use the equation described above to help you decide just how hard you want to play that market squeeze.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.