Could Weak Oil Lead to Higher Gasoline Prices?
Fundamentals
It certainly does not seem to matter where you look, the forecast for energy demand in 2009 is weak. OPEC has once again lowered its estimate for world oil demand by an additional 400,000 barrels per day (b/d) to 84.18 million b/d, vs. 85.55 million b/d in 2008. The International Energy Agency (IEA) announced last Friday that it expects an additional drop of 1 million b/d in Oil demand from its earlier estimate and believes demand could fall even more due to the global economic slump. The Energy Information Administration (EIA) predicts that U.S. Oil demand will be down 2.2% this year. This lack of demand has caused U.S. Oil supplies to rise sharply to levels not seen since the fall of 1990, as the weekly EIA energy stocks report had U.S. crude inventories rising by another 5.6 million barrels last week! Refineries have begun responding to the anemic demand for fuel by cutting refinery utilization sharply. Last week U.S. refineries were operating at 80.4%, down 1.4% from the previous week. Lower refining rates have affected U.S. Gasoline supplies, with the EIA reporting that U.S. gasoline supplies fell by 900,000 barrels last week, despite a moderate drop in consumer demand last week. Though the U.S. currently has ample gasoline supplies on hand, one of the biggest fears of many traders and analysts is what will happen if the economic recovery comes earlier than most expect. Will refineries be able to ramp-up production soon enough to meet any increase in demand? Will the U.S. be able to import enough gasoline from Europe to buffer domestic stocks? This issue could be critical to any economic recovery attempt, as a rapid rise in gasoline costs is the last thing a struggling economy needs when it's trying to get back on its feet.
Traders who believe we will see an economic recovery this year may wish to investigate the purchase of RBOB Gasoline call options. An example of this trade would be buying the December RBOB 1.50 calls or the 1.60 calls. With the December futures trading at 1.4230, the 1.50 calls could be bought for $8,820 and the 1.60 calls for $7,350. More conservative traders could look to lower the overall cost of the trade by selling a December 2.00 call against either of the long calls to create a bull call spread position. The maximum risk on these trades is the total premium paid.
Technicals
Looking at the daily chart for the June RBOB Gasoline contract, we notice prices forming what appears to be a symmetrical triangle pattern. This technical pattern is normally formed during a consolidation phase before the next trend emerges. Traders should be on the look-out for a price breakout from the consolidation, and if the breakout occurs on higher than average volume, the validity of the breakout is enhanced. The 14-day RSI is confirming the current neutral stance with a current reading of 53.82. The recent high formed on March 26th of 1.5626 remains major resistance for the June contract, with solid support found at the April 1st low of 1.3560.
Mike Zarembski, Senior Commodity Analyst
