Over the last couple of weeks, there has been a lot of talk about whether gas prices will hit the $5 per gallon mark around the country this summer. I think the probability of that is very low. There will certainly be isolated parts of the country in which five is the first number you see when you go to fill up, but even that should be short-lived.
Don't get me wrong — it won't be the days of $3 per gallon, either. I think the price you will see will be in the $4.20 to $4.40 range, but only for a few weeks, before it settles down to $3.90 to $4.10.
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.
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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.
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