UGA ETF: Approaching Gasoline Panic

| About: The United (UGA)

Each week the Energy Information Administration publishes the TWIP Report (This Week in Petroleum). There is a design flaw in this report that creates an investment opportunity in gasoline futures (RBOB) and ETF (NYSEARCA:UGA):

  • Inventory stocks reported included non-operational gasoline in ships, pipelines, tanks, etc...
  • Current "Stock" is reported at 202 mb or about 22.5 Days of Supply (Reported Inventory) at 9 mb/d consumption.
  • Based on Sept 2008 data in the U.S. Southeast, Operational Inventory hits zero when Reported Inventory is about 190 mb or 21 Days of Supply.

The "5-year Range" (blue band) shows a 15-20 mb inventory dip in September /October. This dip is inventory pulled out of Reported Inventory as drivers in the U.S. Southeast experienced gas lines in 2008 and shifted their behavior from mostly-empty to mostly-full tanks.

TWIP Gasoline Aug 22, 2012

In July, 2008 I published an estimate on similar inventory risks in the Southeast. In September 2008 the gas lines hit. On June 15, 2012 I published a guess that gasoline futures (RBOB) were likely to jump-- they increased from $2.70 to $3.099 today. UGA is up 30% from June. On Aug 5, 2012 it was apparent that this year's hurricanes were likely to wear away at gasoline inventories. Isaac, even without damage, will drag on gasoline inventories as crews are pulled from oil rigs and refineries prepare for the storm.

There are other nicks to the supply of gasoline. Richmond refinery fire and Venezuela refinery fire add drag. My guess is European debt and complexities to EU refineries collecting from their customers and buying feed stocks will drag on U.S. imports. Drag on inventories can take weeks to work through the pipeline. Driver psychology is hard to judge, there is only the one data point of gasoline panics in 2008.

There are opposing views that gasoline inventories will be stressed.

I recommend watching the TWIP report and other indicators of gasoline inventories. If inventories drop near 190 mb, a driver panic could shift driver behavior resulting in a run on existing Reported Inventory. The regional panic in the Southeast in 2008 pulled about 15 mb, a general panic in the U.S. could pull 70 mb and result in gas lines that last for several months.

I expect gasoline futures to climb if gasoline inventories continue to decline toward 190 mb. In a panic, my guess is future prices will jump more than the 10%.

The EIA could do a much better job of providing data on what are my guesses.

Side Notes:

  • A release from the SPR to sting oil speculators will not likely affect gasoline futures. The upward pressure on gasoline futures is caused by inventory fundamentals.
  • Speculators provide an incredibly valuable service. Speculators are the maggots that feed of the gangrene of bad policy. Politician criticism of speculators is a smoke screen to deflect responsibility for the wound politicians caused.

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.

Additional disclosure: Author is the founder of JPods, Inc. a PRT transportation company.