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By: Brian Price
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Gasoline futures have been an incredible run, rising 14 percent in three weeks. In fact, on Friday, RBOB gas futures hit a four-month high.
Traders blame the spike on supply and refinery issues. The gasoline rally has come alongside a similar move in crude oil, which hit a fresh 16-month high on Friday.
(Read more: Crude reality: Oil could crimp rally)
The rise in gasoline futures is already affecting prices at the pump. Gas prices have risen an average of 15 cents in the past week, up to a national average of $3.65 a gallon, according to the AAA Fuel Gauge Report.
Crude continues its runup, reaching for $110 in Friday's session as the impending expiration of the August contract, a short squeeze and the desire to cover shorts into the weekend are adding fuel to the fire.
The path of least resistance remains higher, as Wednesday's option expiration allowed volatility—and bullish volatility, at that—to slip back into the market. The high on Thursday was $108.43, and the market experienced a quiet overnight session.
As we head into the weekend, I would not expect to see a switch in direction, and it is more likely that we will see a run at the $110 level. With economic conditions stable, demand worries on the back burner, and crude stockpiles at the lowest level since January, traders have had no reason to sell oil this week.
(Read more: Crude reality: Oil could crimp rally)
A stronger U.S. dollar may sound like a good thing, but it's providing a serious headwind to earnings. And the situation could get worse.
"We're seeing a lot of high-level names already report the effect of a strong dollar," said Kathy Lien, BK Asset Management managing director. "We've got Coca-Cola saying that, and Johnson & Johnson. IBM said revenues were down 3 percent, but would only be down 1 percent if it weren't for currency effects."
Indeed, on Coca-Cola's Tuesday's earnings call, CFO Gary Fayard noted: "On a comparable basis, the impact of currency was a 3 percent headwind on this quarter's operating income results." And Fayard foresees that headwind growing stronger. "We expect currencies to be a 4 percent headwind on our operating income for the third quarter and full year," he said.
The Dollar Index, which tracks the value of the U.S. dollar relative to a basket of other currencies, has appreciated over 4 percent this year. This poses a problem to multinational companies because it means that the foreign currency they receive is worth less when converted back into dollars. For instance, when a dollar could buy 87 yen at the beginning of the year, someone paying 100 yen for a can of Coke is effectively paying $1.15. But with the dollar/yen trading at 100, that same person is effectively paying only $1.
It's a crude reality for the market: Oil will put an end to the rally. At least, that's what some market participants contend.
"The increase in the WTI oil price is creating too strong a headwind for growth and further equity gains," Encima Global President David Malpass wrote on Wednesday. "We think there will be a pause or retracement in equities until growth prospects improve or oil falls."
Over the course of three weeks, oil has rallied 12 percent to the highest level since March 2012, and Malpass believes that rising oil prices could pose a problem both for consumers and for businesses.
"It's an important cost of doing business, and may undercut profits and business confidence. From the standpoint of the consumer, it acts as a tax increase, reducing the income that could be spent elsewhere," he said.
One of the reasons Malpass is so concerned about the oil rally is the reason behind it.
"Expensive oil brings new negatives," Malpass said, and "this is particularly true when the increase in oil prices is caused more by supply concerns than an increase in demand."
(Read more: Here's when high oil prices could really pinch)
The API numbers showed a build of 2.6 million barrels, and the EIA number that was released on Wednesday morning showed an even bigger build of 3.1 million barrels. So if we are showing a build in supply, why the strength?
There are a few factors—and while each is small, when put together, they spell out near-term supply problems for gasoline.
Refiners have had a few snags in getting supply out, with maintenance issues, unplanned shutdowns and problems with pipelines being the most visible. That is coupled with an increase in demand, which is because of the driving season and a slowly improving economy. Put this together, and the supply and demand picture is giving us a recipe for higher prices.
(Read more: Gasoline at the pump still rising but peak in sight)
The good news is that in a few weeks, the market will realize that we will have enough supply to meet demand, just as the summer driving season is winding down. This will cool off the market, but the wild card after that will be hurricane season.
It's a big day for Big Ben, and gold should respond accordingly.
Look for gold to fish for stops above last week's $1,297 high, as it tests $1,300 upon the release of the text of Chairman Bernanke's prepared remarks to the House Financial Services Committee. These remarks helped bond prices and equities rally, in addition to gold.
Investors are eager to see gold back above $1,300, after Bernanke said just last week that a highly accommodative monetary policy will remain in place for the foreseeable future. One has to question, though, what this really means.
As Bernanke appears before the House Wednesday to present the Federal Reserve's semiannual monetary policy report, the main topic of discussion will be the Fed's potential exit of the $85 billion monthly bond-purchasing program. The other big topic on the table will be the benchmark interest rate.
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