PARIS (ResourceInvestor.com) -- Everyone was expecting a draw down in U.S. gasoline stocks. If you have been following our previous articles, you should understand why. Hurricanes smashed refineries. Refineries could not make petrol. Other refineries made lots to make up. Then they in turn were repaired this year. Ok, now you have been caught up.
Demand has not stopped growing in any major way. Therefore, the whole complex was sucking up as much as it could. In general, although to some extent it does not make sense, it means the price of oil goes up. So we smashed all records. We smashed the NYMEX, Brent, OPEC basket, Mexican basket and everyone else’s record price.
Brent was at so much of a premium, being oil of the creamy smooth variety, that it became more expensive than the NYMEX variety, a real rarity. It is easy for the older, less complex refineries to refine. Then all of a sudden the price ‘slumped’ as the mass media have been saying, I am looking at you CNN. It ‘slumped’ to a mere $69.80 intraday Thursday.
Because against expectations the stocks of gasoline stocks actually went up - in the United States that is. You would think sometimes that the rest of the world still travels by obedient Yak given the way American figures are interpreted. But they are all important in our current market, so when American gasoline built, everyone sold.
Now, if we had been able to write an article last week, we would have noted that long positions on the market had reached bumper levels. So had prices. The combination of the two means that at some point everyone will cash in their chips. It stands to reason. If you take out a long position it is not for fun, it means that at some point you think the price will come down.
When you are long and the price is at record levels across the board you have made money. So you cash it in, so do lots of people. All the way down the line people are cashing in their long positions, even if they got in at a reasonably high price. So the two mixed together makes one thing, volatility.
It is opposite to the end of last year and most likely this one too. Then, traders wanted huge bonuses for themselves and the people they work for. So after the hurricanes, they shorted the market to pieces. It forced oil to its current absolute floor, $55, so that they could make a lot of money. It is no conspiracy; it is just that everyone involved knew the rules of the game. Then when the combination of a low price and lots of short puts came to its conclusion, the price boomed back up.
Unfortunately for the bears, U.S. gasoline stocks have built in this particular week every single year this decade. Yes, that is right, U.S. gasoline stocks always build about now. It might be something to do with driving habits, holidays or the end of the maintenance season but they always seem to do this. The average this century is a 2.9 million barrel build. This week was a 2.1 million barrel build, below average.
That was a big enough signal for selling. U.S. demand was also revised downwards for February, so that too gave a few people reason to jump on the mini-bandwagon. But now we have made another sharp move up through record prices, underpinned by geo-political fears and the basic lack of a supply cushion. Without wanting to sound slightly repetitive, this is the same story as the last four years.
The global economy, compressed as it has been into fewer and fewer hands, has the ability to absorb price increases. It can pass them on much more slowly. We are probably seeing the effects of oil price of 18 months ago, maybe even longer. But at some point these prices will feed through into the global economy and somewhere a wheel will fall off. That is unless you think we have found a magic formula and everything will go on forever. If so keep drinking the Absinthe....
When that happens, then oil demand will stagnate, the price will fall, investment in new capacity will be cut and we can get on board to do the whole thing again. But in between then and now, we are going to see lots and lots of weeks like the one we have just had. Lots of ups, lots of downs. So, if you think the next ‘up’ is far away - think again. Remember $69 is a ‘slump.’
