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In keeping with the strategic philosophy offered in this issue’s Commodity Outlook, we would like to point to the potential for a major bottoming in unleaded gasoline prices later this year. In the meantime the market continues to see a patently bearish supply build-up in the front end of the energy marketing channel. But without a significant refining margin, there is little incentive to build product supply. This could ultimately prove to lay the groundwork for a major bottoming in RBOB prices this spring. Further slowing of the economy appears to have left the energy markets anticipating even more demand destruction directly ahead. With the Dollar recently seeing a pattern of strength, there would seem to be a number of forces working to keep near prices tilted to the downside. On the other hand, given the state of the economy and the drive for efficiency, it is our opinion that US refinery rates are going to remain very low.
In the coming two months we might see operating rates fall as low as 80%. While some players will discount the importance of ethanol in the natural energy supply chain, it has become somewhat important in various regions of the US, and a sustained lack of profitability in that sector could put yet another element of tightness into the US product markets in the coming months. Into the middle of December, US gasoline stocks were as much as 7.3 million barrels below year ago levels. Even with the recent deficit narrowing to only 1.7 million barrels, we suspect that any deficit at all could be very important indicator for future price action, especially if the new government manages to “re-contain” financial sector turmoil and the prospect of aggressive stimulus is given more fanfare.
Clearly, implied gasoline demand is running markedly below year ago levels, but we have to think that retail gasoline prices running as much as $2.25 per gallon below what they were last spring and summer will serve to resurrect consumer demand. While the market probably won’t offer up any early, clear signs of an improvement in the US economy, it is our opinion that even a slight improvement in sentiment might be worth as much as 50 cents per gallon in unleaded prices. In other words, we think that traders have to play for the prospect of May RBOB prices rocketing back above the $1.70 to $1.85 level at some time before the contract goes off the board. However, the lingering threat of demand destruction, a strong Dollar and periodic bouts of deflationary pressure could initially damage any investment in long May or June RBOB call premium. Therefore traders should attempt to hedge the speculative costs of that play with the purchase of at the money March RBOB bear put spreads!
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