Something Big Hits the Oil Markets... Starting Tomorrow

Something Big Hits the Oil Markets… Starting Tomorrow

by | published November 6th, 2012

Election days bring me back to my professional academic roots.

While the energy sector is where I focus my time these days, I was trained as a political scientist. I still find elections to be the most genuinely exciting thing about democracies.

Even if the candidate you support is bound to lose.

To me, it’s all about participation. There is a Norman Rockwell Saturday Evening Post cover of an average guy standing up to speak at a town meeting that still resonates every time I pass by it. (I have a copy hanging in the hallway outside of my office).

Today, we should take a moment and watch the election returns.

Markets in general – and the energy sector in particular – are not likely to move much over the next few days. Elections have a way of doing that, especially when the chance emerges that absentee ballots in several states and provisional ballots in Ohio (those who applied to vote absentee but show up at the polls anyway) could prolong the count into next week.

The experimental ad hoc electronic voting and casting ballots by fax introduced to combat the effects of Hurricane Sandy will also create their own problems. However, at least in that case the election impact will probably be marginalized. President Obama will likely carry each of the states affected by the storm.

But that is what the presidential count is all about. It is the electoral not the popular vote that decides the next president. Even determining those figures may still make for a long evening and then some.

Even still, here’s what we do know.

The presidential race will have a much smaller impact on the energy markets than the other result set to happen tomorrow.

Washington Will Remain Broken Tomorrow

Regardless of which candidate wins the Presidency, Washington remains divided along the most acute ideological divide since I began voting more than four decades ago.

The real concern is not the man occupying the White House on January 21, 2013.

It is how we deal with an impending financial precipice (sorry, I am tired of saying “fiscal cliff”).

That divide remains the real political crisis as we approach the end of the year. The genuine likelihood is that we will again kick the can down the road on our fiscal future. Most politicos assume there will be another band-aid put on the sore, but it is the continued uncertainty that is weighing on the markets.

This uncertainty will weigh on the energy sector, particularly on oil prices.

The actual dynamics of the oil sector (the combination of paper barrel/wet barrel differentials, geopolitical pressures, inventory levels, supply concerns, and infrastructure dimensions, among others) are moving indicators up. Meanwhile, the continued angst over emotional readings of headlines and doomsday pundits are pushing them downward.

This election merely compounds that distinction.

Markets are always subdued before a tight election. That combined with the aftermath of Hurricane Sandy we discussedlast week has leveled off both crude oil and gasoline prices. But there is also another matter of interest surfacing.

The Storm’s Impact on the Futures Markets

Both crude oil and RBOB (Reformulated Blendstock for Oxygenate Blending, the gasoline contract traded on the NYMEX) are exhibiting backwardation. That means as you move further on the futures curve, longer out months are pricing cheaper. Not by much, and not a particularly unusual event approaching an election.

But enough to discourage holding inventory.

Normally, it should mean that oil product prices would come down. And gasoline certainly has over the past several weeks. Even Sandy’s wrath and the long lines at gas stations did not increase prices.

This was not a matter of product shortages, despite the closures of nearby refineries in the region. This was all about maintaining refinery margins and thereby revenue flow.

We have indications today that the declines in both crude and gasoline are leveling off and beginning to rise. Yet these have little to do with hand wringing over an election or concerns about the next storm barreling down the same coast.

Rather, it reflects the ongoing market impact of broader uncertainties. These include:

  • Congress’ inability to agree on tax policy in 2013;
  • The ongoing Euro Zone problems; and,
  • The business decision by U.S. companies to hire only those workers necessary to keep the current level of production or service going.

As you can see, there are more endemic issues than counting ballots this evening.

What Happens Next

Nonetheless, there is an indicator emerging that does tell us what is likely to happen once the next Washington quick fix is approved (probably just before the roof caves in, if the recent embarrassments of Congressional inaction are repeated) and the troika approves the next Greek bailout (should happen in a week).

Most analysts don’t follow this one, but I have been tracking it for some time.

It deals with the use of crack spreads (in this case, trading futures of crude against futures of gasoline and low sulfur heating oil).

While the gasoline situation is leveling off, heating oil and its cousin diesel (they are both produced from the same cut at a refinery) have not. These have been indicating a constricting of the market.

And that constriction will kick in whether there is another hurricane and despite the party label of the next president (or Congress, for that matter).

We are about to see another rising price cycle.

Rest assured that when the figures give me the signal, you will get the heads up.

Editor’s Note: Oil prices are heading up. And investors just like you have been waiting for the perfect time to start profiting. To learn how the markets really work and why today is the best day to begin investing in Kent’s newest stock picks, click here now.

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  1. November 6th, 2012 at 12:59 | #1

    THANKS !

  2. John Hoskins
    November 6th, 2012 at 14:56 | #2

    You’ve recommended selling Baytex (BTE). My problem is that it’s the largest holding in my whole portfolio; I bought shares several years ago at $9.95/share and now survive on its $600/mo. dividend. Value of its shares seems to soften daily. What to do???

  3. enthusceptic
    December 8th, 2012 at 09:45 | #3

    Natural disasters like Sandy usually zero themselves out economically because of the reconstruction boom afterwards, although this doesn’t bring all service industry jobs or destroyed houses back. Life goes on, and we know that human beings everywhere are extremely adaptable.

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