Gas Stations… Are Out of Gas
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?
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.