Monday, June 20, 2011


Gas Prices are falling a bit and as you can tell from my previous post on Friday I have set a "Line In The Sand" regarding where I'd be stopped out on it. 

There are several things going on that we must be aware of.  I'll lay them out here in bullet form so we can at least have a perspective of what might be pushing this trade lower.

A)  Oil and gas were too high already due to speculation
B)  Middle East unrest was one of the major components of the spikes in oil and gas and there has been an easing of tensions and everything is fine in the area.
C)  Europe and the EURO seem to be coming apart at the seams and this is bearish for global productivity
D)  China and India have have reduced consumption drastically.
E)  The green movement in the USA has discovered a green source for unlimited fuel for cars.
F)  Summer driving season is on hold.
G)  Central bankers realized that this out of control commodity inflation has totally boxed them in and a hit was put out on high input prices. 
H)  A bailout in Europe is effectively a stimulus package gone wild.  Again, the box that central bankers have created is getting smaller.

For the home players out there, I'm inclined to believe that perhaps A, C, G, and H are the only viable answers here.

A)  Perhaps oil and gas got a bit frothy when brent hit $119 or $120 based on the demand out there and levels of inventory.

C)  Euro tension and the Greek situation can't be good for making Europe move forward and growing.

G)  Of all the answers, I think we can see that the guys that have the most to gain from a drop in oil and all commodities are the central bankers.  Coordinated moves to hike margin requirements and douse the flames of speculation are in the interest of these financial leaders.  If the price of oil cannot be controlled, the economic engineers have no room to extend stimulus, because each additional dollar provided is drawn away to speculative assets or consumed to pay for high priced inputs.  The drag caused by high commodities is nasty and has been the target of verbal attacks by Ben Bernanke when he stated that inflation is "transitory".  As we've discussed, he is making this statement to form expectations and drive the market in the direction he desires, trying to "Jedi mind-trick" the market into believing that "inflation is transitory".

H)  If the ECB and IMF and countries step up to bail out Greece, we should see a trade where gold and silver rise, perhaps oil and gas due to since it is inflationary.

Adrian Mitchell and Jennifer Waters have a conversation about gas prices in the pop-up link below.

I've summarized several of the key points;
  • Consumers initially freaked out when gas prices were rising in January and February.  At this time, they are now calming down and are making the assumption that gas prices won't be high forever, that they will be  flat to down next month.
  • Fewer delaying car purchases
  • Consumers now say they feel better and are not considering themselves poor anymore.  Who are these people?  They are still poor.
According to the interview, they quote a report by Richard Hastings of Global Hunter Securities who says that we cannot assume that just because we have a dip in gas prices that the consumer is back.  He had estimated that consumer spending in May and June would be choppy and despite a little relief, consumers are slow to change habits now that they have ingrained some budgetary discipline.  In other words, people say one thing (like things are better) but when things have been bad it takes them 4 or 5 months to act.
Finally, the message is that if conditions of falling prices persist we might see improvement in spending and a thawing of the conditions of the frozen consumer, but when gas prices go up again, then all bets are off and we'll see a big slow down.

Ultimately, there is a feeling sigh of relief, US consumers are dealing with the change and budgeting in the price of gas.  They say that the take away is that the consumer is not going to make any rash decisions during this time.

While I have a hard stop on my UGA positions I must reiterate several key thoughts about oil and gas. 

First, the impact of the growing consumption of oil by China and India cannot be ignored.  This  is one of those major macro ideas that sets the foundations for long-term trades.  If oil dips or even crashes, the long term trade fundamentals will be in tact and that should be reason to buy oil and gas. 

Second, Middle East tensions have not abated at all.  There is no reason to believe that peace has returned to an area where discord is the norm.  We must watch Iran closely at this time.  Any major actions in the Middle East have the ability to push oil and gas through the roof.  Also Libya is a mess and the entire conflict is about oil, don't let the cover story about freedom fool you.

Green transportation is quite unreliable.  Until I can be assured to go 450 miles without a refill or a plug in, AND maintenance of batteries is not astronomical, as far as I'm concerned it is a waste.

Don't let the central banker box idea pass you by.  We are going to see many creative steps engineered by central bankers in an attempt to wriggle out of the inflationary box they have created.

$48 is still the stop on UGA.


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at