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Gas Stations… Are Out of Gas

by | published May 13th, 2011

Occasionally, what I write about here in these columns collides with what is happening in my daily life. Yet I have to admit, the latest episode caught me by surprise…

Something unfolded here in Pittsburgh over the weekend I don’t recall seeing since the great oil embargo of 1973.

For me, it started simply enough. I turned off the road into a gas station to fill up… only to find they were out of gas.

So were the next two stations I drove by.

Finally managed to locate some gas… but the problem in this area will remain for at least a week. I started looking around and found one other place in the country having the same problem – Oklahoma City.

Gasoline prices have come down dramatically in futures trading, yet the reverse is happening in Pittsburgh. Prices are up 10 cents per gallon in the same week that gasoline futures were sliding. We are now at $4.09 a gallon – only 11 cents or so from the July 2008 all-time highs for this part of the country.

Such a contrarian move is unexpected. But why it is taking place is just plain unbelievable… and very troubling.

First, though, let me set the stage.

Gas Prices Are Sliding, But
Nothing in the Oil Sector Has Changed

As of close of trade yesterday, the NYMEX gasoline futures contract used to set wholesale prices was off 12% since April 29, losing 42 cents. Meanwhile, NYMEX West Texas Intermediate (WTI) futures contracts – the benchmark indicator for New York crude oil trading – has fallen 13.3% during the same period.

Both have begun the inevitable babble about another bubble burst and a collapse in commodity options trading. Almost seems a wake is being planned, and we are all supposed to send flowers.
But the truth is, nothing died.

Those prices will be coming back up again.

The oil sector is merely recalling one of Mark Twain’s immortal lines: “The reports of my death have been greatly exaggerated.”

Nonetheless, some news commentators, apparently having nothing better to do, have decided to start demanding that the companies cut prices at the pump. In a normal market, it takes up to two weeks for a major change in gas pricing to make its way into the retail chain.

Well, does that means prices should be going down?

Yes, but they will not reflect the decline in oil pricing.

The best illustration is what occurred in the second half of 2008. By the last day of trading in the year, crude oil prices had collapsed 71% from a high of $147.27 a barrel. Prices for regular gasoline, however, declined only 57%.

Still, the price should be coming down, right?

We may see a (welcome) downturn, but, as I mentioned on Tuesday, nothing of significance has taken place in the oil sector to warrant either a deep or protracted decline. (See “You Can Still Profit from the Oil-FOREX Options Spread,” May 10, 2011.)

Was it overheated? Yes. Were the option balances skewed to levels out of whack with market fundamentals? Yes. Have those fundamentals changed to justify a continuing decline in price?

No.

Both crude oil and gasoline futures are now beginning to level off. Those who were caught long have unwound their options positions, and, with the monthly expiration date approaching (next Friday), new trading spreads will emerge.

As I have mentioned here (“Can You Spell V-O-L-A-T-I-L-I-T-Y?” May 6, 2011), volatility will continue to grip this market – in both directions. And it has been quite significant.

Using the last four months to provide a base, the performance in the four-session period between May 3 and May 6 – in which the WTI price collapsed over 14% – provides a statistical deviation beyond the ability of normal options trading software.

That’s pretty incredible.

Back here in Pittsburgh, something quite different is playing out…

A “Summer Blend” Shortfall Is to Blame

The shortage of gas and the rising prices here are a result of problems in the supply network. Specifically, the Pittsburgh metropolitan area, as with others nationwide (Oklahoma City, for example), must have additives for summer driving.

The Environmental Protection Agency (EPA) mandates that retailers in designated metro areas switch from “winter blend” 9.0 fuel to cleaner-burning 7.8 “summer blend” between May 15 and September 15. Stations that continue selling the “winter blend” are subject to fines of $10,000 per day.

The policy is certainly known, as are the dates. They happen every year.

But somehow, this year, distributors can’t find sufficient volume in the wholesale market to supply all the retail stations.

The gravity of the shortfall is seen in the fact that some wholesalers are even petitioning the EPA to provide a waiver.

Putting it in perspective, this is a problem that will be rectified in a week or so. It does not usher in the beginning of the end; it does not mean the Mayans were right about that December 21, 2012, thing.

But remember that this is a localized episode affecting a small part of the U.S. population as we move forward. It just might be the first instance of a new – and disquieting – development beginning to take shape.

Because in the market we have come to rely upon, where the supply/demand equilibrium remains such a sacred cow, this should have never happened. Period.

Sincerely,

Kent

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  1. Kris Astaphan
    May 13th, 2011 at 10:44 | #1

    Kent, I have over the years subscribed to a number of investment letters. Yours , by far, is the best. You give very sound commentary based on real world understanding and experience.

    Grateful.

    KA

  2. George A. Cronk Jr.
    May 13th, 2011 at 10:45 | #2

    Dr. Kent, please devote future columns to 1) the percentage of Alaskan oil that is routed directly to Japan, not the lower 48 states and 2)the rise of regional gasoline distributors that took over from the majors (e.g. sold by Exxon) owning or franchising retail station outlets and the impact on gasoline pricing and the delay in price changes.

  3. Big G
    May 13th, 2011 at 10:49 | #3

    Demand destruction is in full swing and this time its global. When the world wide depression hits, Gas will be 99 cents if not lower. Cars will be selling at 1970 prices. Soup kitchens will be a primary employer. Good luck with that.

  4. dan
    May 13th, 2011 at 10:54 | #4

    EPA that says it all more and still GOVERNMENT regulations by an unconstitutional dept.

  5. May 13th, 2011 at 11:10 | #5

    Dr. Kent
    As I enjoy reading your richly (in content) posts, I do want to know if Oil will be stabilized in the 80’s or 90’s tag barrel price any time soon? And what would be the outcome (in your forecast) for the next 12 months ahead, worldwide?

    Mario J.

  6. Jerry Toon
    May 13th, 2011 at 11:45 | #6

    A couple of the companies that were recommended by you and in which I invested are SATC and LNG. Both of these have really been “hammered”. Can I expect to regain my investment in these two cmpanies in the near future are do you consider these long term holds??

  7. May 13th, 2011 at 11:48 | #7

    Great article. The markets are dysfunctional and easily manipulated. One of the more interesting things that is also happening is that refinery utilization is way down this year. This week’s DOE reports, which are somewhat questionable, showed a market overflowing with surplus gasoline. There isn’t enough storage space in the Cushing terminal to hold the WTI that’s being traded. So we have a market awash in surplus and prices are very slow to drop. The oil industry model in the long term (next 10 years) is to sell less product at a higher profit. It’s all about supply and demand – they supply less fuel, and demand more money for it. They are doing it because they can. Perhaps more importantly, we can expect price relief in the short term for about as long as the current hearings into price manipulation and Big Oil profits are being conducted in DC.

  8. Bob
    May 13th, 2011 at 11:54 | #8

    I need and crave simple straight talk. Supply and demand is not a religion it is a relevance that effects price. Cynicism or sarcasm is too easily miss-understood especially when portraying the disruptive interplay of politics. So your local temporary supply problem???? How is it relevant to the fact that you’ve talked me into tying up $16k in your scheme of things here? Plain and simple (options are over my head)where do we go from here?
    Here is a much more relevant question;
    Exactly how are we to correctly manage an appropriate amount of money to invest with you? Not knowing roughly how many positions or what kind of positions to take prevents a meaningful allocation of my funds. Wasupwidat????????

    PS To Kris Astaphan; Please talk in specifics. This is not a cheer leading session. Thanks for any experience and understanding that you may possess.

  9. Dick McClure
    May 13th, 2011 at 12:07 | #9

    I recall that a few years back, when gas prices were about to be raised, that a local filling station put up a sign saying “out of gas”
    so that they would be able to sell their whole supply at the new price, 2 days later, for a quick $2000 profit.

  10. John Flynn
    May 13th, 2011 at 13:13 | #10

    The volatility of some of these energy stocks seems incredible. Could you comment on Atlas Pipeline and that Lithium mining consortium?

  11. Jane
    May 13th, 2011 at 14:54 | #11

    Dr. Moore,

    I do enjoy your sense of humor. If it’s not the Mayans maybe it’s plant X or niburu.

    With humor,

    Jane

  12. tom gill
    May 13th, 2011 at 15:15 | #12

    I cannot see how gasoline is not available in any parts of this country…where I live in North Texas gasoline stations are developing as we speak on practically every corner in my area…the winners seem to be Quick Stop and Race Track…not sure if they are going to be taking over or not when the major oil companies decide to get out of the retail business of selling fuel to the small consumer. Maybe you can give us some insight into that. But, as I said, there is no exagerating the number of fuel stations that have surfaced on the corners of north texas where I live and the number that are being developed as we speak…it looks as though they are readying an expected windfall of consumers…how can that be done without fuel to sell? Happy motoring

  13. kay coker
    May 14th, 2011 at 07:45 | #13

    Thus far we’ve made 3 investments that you raved about only to see a quick $3000 loss! I’m considering cancelling my subscription before I lose my subscription fee too! Does it only work if you buy everything in the portfolio? I’d like to hear if others have encountered such losses.

  14. May 15th, 2011 at 22:50 | #14

    Where does Lithium mining come into this? If you have information on Lithium I’m all ears. Of course if you have information on Race Track and Quick Stop I’ll listen up on that as well.

  15. Jim Libs
    May 16th, 2011 at 11:13 | #15

    Took your advice on the June 53 call from last week. With it being down almost 40% are you still recommending it ?

  16. May 23rd, 2011 at 08:01 | #16

    Gas prices have fallen below 3 a gallon in many parts of the country including this gas station inMedford Mass……….. After marching relentlessly higher this year gasoline prices suddenly have made a sharp U-turn in the past few weeks. Refineries are running at 93.6 percent of capacity the highest levels since hurricanes Katrina and Rita took a big bite out of production last fall…Prices are dropping so fast that in some Gulf Coast markets gasoline costs less than the crude oil it takes to make it said Kloza… I think well quickly see prices move to 2.50 on a national average and may go as low as 2.25 said John Kilduff an oil analyst at Fimat USA…Just as the sharp spike in pump prices this year had multiple causes several factors have combined to send prices lower again…Much of the price run-up was based on fears that gasoline producers still recovering from refinery damage inflicted by last years hurricanes would have trouble keeping up with the annual rise in demand for the summer driving season.

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