Feeling the Pain

Jim Brown
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Holiday travelers are feeling the pain this weekend with gasoline prices rising ahead of the Memorial Day weekend. Prices hit record highs in some cities in the Midwest.

Gasbuddy.com showed the average price in Minneapolis rose to $4.32 last week and a historic high. Problems at regional refineries all around the U.S. and pipeline issues in other parts of the country all combined to push prices higher.

Planned refinery outages at the Exxon plant in Joliet Illinois and the HolyFrontier plant in Tulsa Oklahoma were joined by unexpected outages elsewhere. Three other refineries were rumored t have suffered temporary shutdowns.

The national average for gasoline going into the holiday was $3.66 and a penny less than 2012 but 19 cents below the 2011 price of $3.85. With Brent at $102.50 and WTI at $93.50 the average price of gasoline should be in the $3.35 range. However, the seasonal factors combined with the refinery outages are to blame for the higher prices.

Historically the price should now decline into the summer and then peak again prior to Labor Day. Aspiring futures traders could play these trends and make a few cents per contract.

Gasbuddy.com Gasoline Price Trends

As oil production increases in the U.S. the price of gasoline will decline. Increased production will lessen our dependence on Brent or other water borne crudes and refiners will focus on the cheaper oil from the U.S. and Canada. This is a very long term process and a sudden improvement in the global economy would raise Brent prices and then WTI prices by association so don't expect to find cheap gasoline ever again. It will just be "cheaper" than it is today.

On the bright side there are no hurricanes on the horizon for the next two weeks. There is a tropical storm on the Pacific side of Mexico but there are no oil fields there to be impacted by the storm.

The National Oceanic and Atmospheric Administration (NOAA) predicted an active hurricane season with a 70% chance of 13-20 named storms of which 7-11 could become hurricanes with winds in excess of 75 mph, including 3-6 major storms of 111 mph or higher. The seasonal average is for 12 named storms, 6 hurricanes and 3 major storms.

They said warmer than average water in the tropical Atlantic and Caribbean and the continuation of the recent climate patterns were to blame for the higher storm count expectations. Also, El Nino is not expected to develop this year to suppress hurricane formation.

The drop in the equity markets hurt oil prices last week along with the decline in the manufacturing PMI for China. The HSBC flash manufacturing PMI for China for May came in at 49.6 compared to expectations for 50.4. That is a 7 month low and shows China to be in a contraction phase rather than expansion. The new orders component also fell into contraction at 49.5 and the lowest reading since September. The PMI report hurt the commodity sector as expectations for demand declined.

The government version of the Manufacturing PMI will be released Thursday evening. Because it is a Chinese government report it will likely be stronger than the flash PMI we got last week. Chinese governmental numbers tend to be overstated. China's full year GDP is expected to grow by +7.5% and that would be the worst performance in 23 years.

The Japanese Nikkei declined -12.5% from peak to trough on Thursday and ended with a -7.3% drop. The -1,143 point decline was the equivalent of a -1,117 point decline on the Dow. Friday was not much better with a -500 point decline at the open but a rebound to close with a +127 point gain.

The drop in the PMI lowered expectations for Chinese oil demand. However, the price of oil did not implode as much as it could have thanks to a sharp decline in the dollar from two year highs on Wednesday.

The volatility in commodities, currencies and bond yields was elevated last week thanks to the economic issues and the various Fed comments. The dollar was extremely erratic over the last two weeks as a result of the comments from the various Fed speakers and the volatility in the economic reports.

Treasuries sold off with the yield rising over 2% and nearing the March highs when we had the last round of Fed chatter to confuse the markets. I hypothesized in the Option Investor commentary that the Fed was being overly confusing on purpose in order to hold down the bond and equity markets and prevent them from soaring further into bubble territory. The Fed can't stop QE until later this year so they are trying to confuse investors. It would not be the first time a Fed Chairman has used this tactic. Greenspan was famous for it.

Dollar Index Chart

Ten Year Treasury Yield Chart

WTI Chart

I expect oil prices to trend lower over the next few weeks but hopefully not as violently as last year. Prices typically decline over the summer and then rise into Labor Day.

Summer WTI Prices in 2012


The U.S. markets are closed on Monday for Memorial Day. However, the S&P futures are active on Sunday night and they are up +5 points. Typically the Tuesday after a holiday weekend is bullish. If the Dow is up it will be the 20th consecutive week and a new record. The market makers will try to make sure it happens.

We are going to be heading into the summer doldrums where traders are absent from the market and spending time with their families. Even the most bullish of analysts are still predicting a weakening of the market the summer. Be patient because we will use any declines as a buying opportunity.

Jim Brown

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