Why the optimism? Have I gotten too close to gas fumes? Not exactly — it's the simple fact of supply and demand.
True, gasoline always moves higher in the spring as we switch from winter gas to the many and more expensive blends of summer. This year, it has happened a little earlier than it generally does, but although we have started from a higher level, the sell-off we saw last week has helped ease the pressure. Now here is where the supply and demand come in. The April gas crack — the difference between the price of April crude oil and April gasoline — is now $42. Rarely in my 20 years of trading have I seen it this high. This means the refiners are enjoying huge margins — and what would any good businessman do with a profit so large? Well, he would try to produce as much product as he could to take advantage of that profit margin. And that's just what you are starting to see with gasoline.
(Read More: Who Benefits From High Gas Prices?)
The refiners are starting to come out of their maintenance schedules, and are starting to produce gasoline at levels not seen in a couple of years. The refinery usage now stands at about 83 percent of capacity, which is a few percentage points higher than last year at this time. Couple that with the fact that outside of the Northeast, gasoline supplies are good, demand is still about 500,000 barrels a day below its peak, and it is now dropping because of the payroll tax hike. Not to mention that unemployment remains persistently high. This is a recipe for a market that has gotten ahead of itself.
There will certainly be increased volatility for the next couple of months as we move to Memorial Day — which will mean trading opportunities. So what trades in particular will I be looking at? If gasoline dips to the $3.15 to $3.05 area, I would be a buyer. Under that, the level to watch is $2.90. As a seller, I am looking at a lot of resistance from $3.30 to $3.35, and then $3.40 to $3.45.
(Read More: What's the Next Stop for Crude?)