Gas bulls may be facing "bull trap"

Horror at the Pump

A gas price horror story is evident at pumps across America as the price, according to the Energy Information Administration (EIA), hit the highest level since Halloween. The EIA reports the national average retail price of regular gasoline increased 5¢ per gallon last week, bringing the national average to a whopping $3.439 per gallon. The last time prices went this high demand fell to an 11-year low. Oil prices that are stubbornly staying around $100 a barrel, along with planned and unplanned maintenance at many refineries, is adding to this nightmare on Main Street. Will gas prices stay high forever or are we doomed to a year were $5.00 gas is a simple reality.

Well actually that price per gallon is not necessarily in the cards. Because of weak demand we are seeing some refiners go into maintenance early. In other words, because of warm weather and weak demand, the turnaround spike that we normally see in late March and April is with us now. Currently gasoline prices are 33.8¢, or 11%, above where last time users and drivers turned away from the pump.

Robert Campbell says that the gas trade might be the most dangerous trade in the energy complex. Gasoline looks to be a tempting bet for some investors this spring with the impending closure of several U.S. and European oil refineries, but the underlying trends for the fuel leaves plenty of downside risk embedded in this trade. The bull scenario for gasoline focuses on the impending closure of as many as three refineries on the U.S. East Coast, along with the Hovensa export refinery in the Caribbean and the likely shuttering of some of the capacity controlled by European independent refiner Petroplus PPHN, which has filed for insolvency. Optimism that the United States economy has turned the corner and is now on the path of stronger growth adds further to the bull case. On the face of this argument, it is a plausible case for gasoline outperforming other parts of the oil complex after several years of lagging performance, but this expectation ignores substantial risks.

Foremost of these is the persistent decline in U.S. gasoline demand even as consumer confidence edges up. U.S. gasoline consumption fell to 8.527 million barrels per day in November, according to monthly data released by the EIA on Monday. That is a huge drop off and one that seemingly confounds the optimism that the recovering U.S. economy will revert the long-term decline of gasoline demand in the world's top consumer of the fuel. This fits with the spate of bad earnings news from U.S. oil refiners, which have blamed weak performance on gasoline prices. Nor is the supply picture altogether positive for gasoline. Massive additions to global refining capacity are expected this year, mainly in Asia, but also in Latin America and the U.S. Gulf Coast. Even if the expected closures in the United States and Europe will curb regional gasoline supplies, the new Asian plants will add gasoline and naphtha back to the global supply picture.


Moreover cheap shale gas in the United States is adding further to the gasoline pool by backing naphthas out of petrochemicals plants and back into the gasoline supplies. But here is where the groundwork for a rerun of the recent strength in distillates is laid. The impending refinery closures will only worsen the tightness in distillate fuel supplies in the Atlantic basin. U.S. East Coast markets will step up competition for the fuel with other traditional export markets for Gulf Coast refiners in Latin America and Europe. After all the U.S. East Coast being shut may produce too much gasoline to remain profitable but they are also part of the supply picture for distillate fuels. As such it is easy to picture a bearish case for gasoline relative to the rest of the oil complex in 2012, particularly if the economic recovery in the United States turns out to be weaker than expected.

Already analysts are warning that the strength in U.S. economic growth in the final quarter of 2011 due to inventory rebuilding by businesses suggests the anticipated first-quarter slowdown may be deeper than previously thought. Nevertheless distillate demand in the United States paints a much more bullish picture than gasoline. Driven by diesel fuel demand, U.S. distillates consumption surpassed 4 million bpd for the first time this year in November and was up a healthy 4.7% on the same month in 2010. Moreover this strength in distillates consumption comes even as the secular decline in the use of high sulfur distillate fuel as heating oil continues. The real problem for gasoline bulls is that a bet on the fuel is essentially a bet on the U.S. economy. While oil and distillate fuel offer global exposure, gasoline consumption is concentrated in the United States. Until the U.S. economy shifts into a more consumer-led pattern of growth the risk of a disappointment in gasoline demand remains very high.

Bloomberg News is reporting that, “China raised its oil inventory capacity to 40 days of supply by the end of last year as it opened new state-owned and commercial storage sites,” China National Petroleum Corp. said today. The world’s biggest energy consumer finished building two state-owned stockpiles and four commercial ones in 2011, Beijing-based CNPC said on its website, without specifying the locations. China is building another six strategic petroleum reserve bases as part of the second phase of a program to store oil for emergencies, according to the statement. China is expanding its crude storage capacity to ensure supply and reduce exposure to price fluctuations. The nation is scheduled to complete construction of an eight-site second-phase program this year, adding 169 million barrels of capacity to the 103 million already built and filled in the initial plan. CNPC was scheduled to finish building two bases in western China at Dushanzi in Xinjiang province and at Lanzhou in Gansu province by 2011, according to reports from the government, state media and state oil companies compiled by Bloomberg. The nation may boost crude imports by 9% to a record this year to fill its storage facilities, while oil prices fall because of slower global economic growth, according to the median estimate of seven traders and analysts in a Bloomberg News survey.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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