Gasoline prices traditionally move higher from the end of January to the end of May. What are prospects this year?
Gasoline prices move higher during their period of seasonal strength mainly because of two annual recurring events. North American refiners switch their production from heating oil for the heating season into gasoline for the summer driving season. During this period, production temporarily is shut down and inventories drop. In addition, refiners normally complete their annual maintenance during the conversion period. If something is going to go wrong, it usually happens during the annual maintenance period. Last year, the industry reported six major unexpected shut downs and fires during the February to May period. North American refineries are old and require an increasing amount of maintenance.
The "sweet spot" for wholesale U.S. gasoline prices is from the end of January to the end of April. The trade has been profitable in 13 of the past 14 periods including the last eight periods. Average gain per period during the past 10 "sweet spots" was 24.8 per cent.
Tip off for timing of the start of "sweet spot" is a seasonal peak in gasoline inventories normally between the last week in January and the second week in February. Gasoline inventories at this time of year already are at the lowest level since 2007, except in January 2009 when the economy was in a deepening slump. The seasonal peak may already have passed this week. Consensus for gasoline inventories reported on Wednesday for the period ending January 20th was an increase of 2.2 million barrels. Actual reported by the Energy Information Administration (EIA) was a decline of 400,000 barrels.
Prospects for an upside move in gasoline prices this year are exceptional despite a four per cent decline in demand due to the improving fuel efficiency by North American autos. The crack spread (effectively the spread between gasoline prices and crude oil prices) narrowed in the fourth quarter to an unsustainable level. Chevron recently lowered its fourth-quarter guidance due to reduced refining profitability expectations. Tesoro, a major independent refiner recently surprised by announcing an expected loss in the fourth quarter.
Analysts are predicting that the U.S. industry will record a loss from refining operations in the fourth quarter. Gasoline prices have not kept pace with higher crude oil prices during the fourth quarter. Prospects for the U.S. refining industry are so bad that the industry has moved to shut down about one million barrels per day of east coast refining capacity. Sunoco and ConocoPhillips recently idled two plants in the Philadelphia area and plan to shut down a third. Together these refineries process more than 700,000 barrels of oil per day. They represent about 46 per cent of refining capacity of the Central Atlantic and New England area. Meanwhile, crude oil prices remain high partially due to international concerns.
Indeed, crude oil prices could move significantly higher if conditions in the Middle East continue to deteriorate. Look for gasoline prices to "play catch up" during their current "sweet spot"
Look for the average retail price of gasoline in the U.S. to advance from $3.35 to over $4.05 per gallon by official start of the U.S. driving season on the U.S. Memorial Day holiday near the end of May if the wholesale price advances by approximately 24.8 per cent, its average gain in the sweet spot during the past 10 periods. Current wholesale price is $2.80 per gallon. A 24.8 per cent gain implies a move to $3.50 per gallon. Add $0.55 per gallon for distribution to reach the $4.05 per gallon retail price. An equivalent change in the price of gasoline in Canada also is anticipated. Assuming no change in the Canadian dollar relative to the U.S. dollar, the price of gasoline in the Greater Toronto Area is expected to rise from $1.22 to $1.47 per liter.
On the charts, spot unleaded gasoline prices have moved sideways during the past five months between $2.45 and $2.86 per gallon. Short-term momentum indicators currently are overbought and have rolled over. Preferred strategy is to accumulate on weakness during the next three weeks for a seasonal trade expected to last until at least the end of April.
A direct way to invest in through the United States Gasoline Fund, LP , an exchange traded note based on gasoline futures and short-term notes.
Following is chart showing seasonality in gasoline prices during the past four years.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/