Gasoline Supply Shocks In California, East Coast Likely

Includes: UGA
by: Bill James

In June, the futures looked likely to jump and they have. ETF United States Gasoline Fund (NYSEARCA:UGA) increased from $46 to $60. My guess is the UGA and Gasoline Futures (RBOB) will increase 5% this week if the crisis is contained in California. If it spreads to the US East Coast, gasoline prices will jump significantly.

Blame the traders has alreadyPeak OilClick to enlarge surfaced with Senator Feinstein calling for an investigation of traders. The long-standing fault belongs to policymakers. My expertise in oil comes from a 14-year effort to get policymakers to allow free markets, so oil-powered urban transportation can be replaced by solar-powered JPods version of Personal Rapid Transit (PRT). The Congressional Office of Technology Assessment study PB-244854 identified PRT as the solution to the 1973 Oil Embargo. Here is a Seeking Alpha summary from July 2008. (click to enlarge images)

Gas outagesClick to enlarge

In the last few days, inventory risks in California finally triggered a jump in prices and outages. Despite claims that the outage is "temporary" and that "it is because of California emissions standards," this problem is national, seems likely to cause gasoline prices to rise and seems likely to spread at least to the US East Coast.

Watch the TWIP report each Wednesday for gasoline inventories. Policymakers cannot solve the gasoline issue by releasing oil from the SPR. They can scramble to import more gasoline. Governor Brown has reduced the emissions standards.

The risk of gasoline outages is at greater risk on the US East Coast than in California. This can be seen in the Regional Gasoline Stock graph (top right, green line). There have been protests by some New Jersey gas stations about the wholesale price of gasoline.

TWIP Oct 3, 2012Click to enlarge

There is a race between decreasing US demand and decreasing gasoline production and imports. Gasoline inventory problems are NOT "temporary" as is being reported. Inventory crisis may ratchet as did gasoline prices from $1.03 in 1998 to $3.50-$6 today, but the fragility in the supply chain can no longer be covered by inventory.

Note that Reported Inventory is radically greater than Operational Inventory. At 190 million barrels, Reported Inventory notes there is 22 Days of Supply (top center graph).

The two divots in the 5-Year US Gasoline Stock graph (lower right) were caused by a panic in the US Southeast in Sept 2008 (forecastable in July 2008). When drivers panic, shift from mostly empty to mostly full tanks, they draw 15 to 70 million barrels out of Reported Inventory.

US domestic oil assets over the long term and gasoline inventories in the near term seem likely to significantly increase in price. There will be a lot of policy actions that seem likely to increase the volatility of trades.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author is founder of JPods, Inc., a Personal Rapid Transit company. Objective is displace oil-powered urban transportation.