The recent jump in gas prices were expected to be much more gradual. We saw
commercial traders
as strong buyers of crude oil below $80 as June came to a close. We
firmly believed that this would be the bottom of the cycle as the
national average fell to $3.30 per gallon. What no one expected were the
simultaneous mechanical failures of some of the main pipelines and
refineries. This has caused the price of petroleum products like heating
oil, gasoline and diesel fuel to skyrocket by 25% in little more than
one month.
The refineries here in the U.S. use about 9 million
barrels of crude oil per day. The last two weeks has seen nearly 2
million barrels per day taken off supply as unplanned shutdowns due to
various mechanical issues and fires have popped up across the country.
Further adding to the refinery issues is a cutback in supply that will
be coming from Canada due to a leak sprung in the Enbridge pipeline,
which has spilled more than a thousand barrels of unrefined crude oil in
central Wisconsin. Enbridge has fallen under increasing regulatory
scrutiny, as this is just the latest of a trail of pipeline failures.
The most notable was a 2010 incident, which dumped 20,000 barrels of oil
into the Kalamazoo River.
Mechanically, major refiners near
Chicago and San Francisco have both been shutdown. There are two
refineries that have been shutdown simultaneously in the Chicago area
and both of them are among the 10 largest refiners in the country with
the Whiting, Indiana facility ranking 7
th and the Wood River, Illinois facility ranking 10
th.
These outages combined to raise the price of gasoline in the Chicago
area by more than $.44 in less than a week. The Chevron facility in
Richmond, California is responsible for 10% of the gasoline production
on the west coast. Reports are conflicted on the how long these
refineries will be out of operation. Estimates range from weeks to
months on each individual facility with consensus that the Chevron
facility in Richmond will probably be out of service the longest.
Political
and fundamental factions had already begun battling over the true value
of crude oil from March through July. This is seen as the battle
between speculators and commercial traders. Commercial traders had been
heavy sellers of crude oil futures from March through May when the
market was trading above $103 per barrel based on Iranian threats and
general unrest in the Middle East, which led to speculative buying.
These threats were competing with a market that was massively over
supplied. Eventually, over supply won and the
Commitment of Traders
analysis generated sell signals at both $109 and $106 per barrel.
June’s precipitous declines moved commercial traders to the buy side as
they covered short positions and increased their positions by more than
30% during the month of June.
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| Commercial Traders in the Crude Oil Market |
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The final fuel to this petroleum
rally is the expectation of further government stimulus to the economy.
We’ve suggested over and over that the key to the upcoming election is
the domestic economy and recent polls concur. The biggest thing
President Obama could do to help himself would be to force a resolution
in the Eurozone. The markets hate uncertainty and any conclusion to the
drawn out death spiral of Ireland, Portugal, Spain and Italy would
create a huge relief rally in the stock market. However, since his
sphere of influence doesn’t extend far past our shores, he’ll do the
next best thing by flooding the market with Dollars, which will lead to
nominally lower interest rates and show that he is taking action.
Regrettably
we will bear the unintended consequence of higher gas prices as our
Dollar is devalued on the global market and our refineries find it more
profitable to ship finished petroleum products overseas, rather than
sell them on the domestic market.
This
blog is published by Andy Waldock. Andy Waldock is a trader, analyst,
broker and asset manager. Therefore, Andy Waldock may have positions for
himself, his family, or, his clients in any market discussed. The blog
is meant for educational purposes and to develop a dialogue among those
with an interest in the commodity markets. The commodity markets employ a
high degree of leverage and may not be suitable for all investors.
There is substantial risk of loss in investing in futures.
