LET PAPER BE OUR FUEL! - GASOLINE UPDATE

AMPLE PAPER FOR EVERYONE!
The seasonal gasoline trade has been my target for the last two years and so far they have been quite profitable.  I've highlighted trades in WNR, VLO, and UGA and all have done well.  As I have laid out previously there is a seasonal component to this trade, but it is also one based on the view that Benny has our back and he and his central banker pals are finding ways to goose the global financial system through their respective liquidity providing measures.  (Explicit or not).  As they go to work making sure that no civilization is ever short on paper or electronic currency, this forces things with real tangible value like commodities to move higher.

THE GLOBAL FEDOLUTION
Last year around the time the Tunisian riots began to break out I suggested that our Fed could be directly and indirectly to blame because global food prices were sky-rocketing and starving people have little choice but to rise up and take action.  I coined the phrase the Fedolution as we can give the credit or rest the blame for the Arab Spring's spark largely with the Federal Reserve.

As we fast forward, incarnations of Fed action have resulted in a continued liquidity driven asset frenzy that has spilled into other commodities.   Since early 2011 we seen hard asset prices bounce around, but thanks to a significant rebound in December 2011 and January 2012 we see that almost all commodities move higher significantly.  Our economic measures suggest that price inflation is really almost non-existent according to the Fed's definition, but somehow we find that domestic gasoline prices are at the highest level for a January ever.

Average January Gasoline Prices

DEMAND SURGING?
There are legitimate reasons for gas prices to be high including refinery maintenance and supply bottlenecks, but I'm not sure this tells the entire story.  We automatically may tend to jump on the notion that the US economy is rebounding and we are seeing a rise in demand.  Unfortunately that isn't really true as US domestic gasoline demand is at it's lowest point in more than 175 months!  Clearly the US driver is not expressing any positive views on the economic situation by filling up more!

Zerohedge does a nice job of describing why gasoline consumption is tanking here - Zerohedge

NO NEED TO DRIVE
While our cars are more economical, this too isn't the reason we are not using gas.  Frankly, I believe we are not using gas is that we have a huge portion of our labor force shut in and they are simply don't need to or can't afford to drive since they don't have jobs.  Despite my assertions on why gas consumption is low, we still see gasoline prices moving higher and the prospects for even steeper fuel prices are pretty good according to Joe Petrowski, the CEO of Gulf Oil.





There are some really good items in this interview that we need to highlight.  Joe mentions that financial issues in Europe are having some impact on refiners there (remember, Swiss refiner, Petroplus filed for bankruptcy in late January) and this is causing a pricing issue globally.

Summer prices for gasoline could be as high as $4.00.

Brent crude could go as high as $130 in his estimation.

Higher gas prices are impacting C-Store retail sales!!

An Israeli / Iran conflict would driving prices to the point where there would be a rationing effect (I think he is suggesting that demand in the USA would crater due to pricing pressure rather than a rationing scenario where the government would limit your ability to fill up).

Every $.50 increase in gas prices takes $150 Billion out of GDP or about 1%.  A price of $4.50 or $5.00 will result in massive cuts in demand.

BRINGING IT TOGETHER - WHY IT TURNS NASTY
I'm concentrating on this gasoline topic purposefully as I am trying to draw together for you my original thesis regarding how the year will play out.  I do see gasoline prices moving higher over the next few months (UGA probably won't rival the 7/2008 peak of $65.00) but as it moves higher, we will get a forced slowdown in our economy as a result of the gas tax on our economy.  The dramatic impact these prices will have will serve to stifle any potential growth and actually cause our economic momentum to swing the other way.  This is why I feel strongly that we will see the market highs for the year in late April or early May.

GOATMUG

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 http://www.goatmug.blogspot.com/