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1 May 18 2011 @ 10:58am by Matt Smith in Crude Oil, energy consulting, Global Energy

Bewitched, Bothered, and Bewildered: Gasoline, Crude, Natural Gas, and Ella Fitzgerald

Ella Fitzgerald is absolutely brilliant. She has the most rabble-rousingly glorious voice which cannot help but inspire. So by borrowing a few song sheets from her extensive back catalogue, I’m going to elaborate on some of the key issues in energy through ‘The First Lady of Song’. First up we’re going to take a look at gasoline, which is ‘Bewitched, Bothered, and Bewildered’.

After writing this post a couple of months ago about how gas prices could land a telling blow to the US economy, they have achieved a psychological breaking point for the consumer as we have recently reached $3.98 on the national retail average.

However – ironically it may turn out – high prices are indeed the best remedy for high prices, as initial signs of demand destruction have given prices a nose-bleed and spurred on a most vicious bout of selling for the Nymex-traded gasoline contract (= Rbob) in the last few weeks:

Rbob Gasoline contract, Oct 2010 - present

But despite the pullback on the Nymex exchange-traded contract, we are not yet seeing this reflected at the pump. There are a couple of reasons for this. As referenced in the previous post, there is a delay from exchange to gas station; it takes approximately five days for a change in price on the Nymex contract for it to be reflected at the pump (NYMEX –> Spot markets –> Rack prices –> Gas station). There is also a sprinkling of price gouging going on as well. But we should still be seeing this weakness hitting the pump approximately…NOW.

The reason we are not is the Mississippi floods. Retail prices are hanging onto their premium on fear of supply disruptions while the Nymex contract has tumbled – both under the influence of the pullback in WTI crude oil ($114 to $94 in the last two weeks), and under the weight of its own burden on the economy.

The premium on retail prices will unwind with the ebbing of the Mississippi; but this will likely take a number of weeks to fully reach the pump. But when it does, we should see prices considerably lower than where they are now:

AAA Daily National Average for Regular Unleaded Gasoline

Next up: ‘how strange the change from major to minor’ (from Ev’ry Time We Say Goodbye). It has truly been remarkable how the death of Osama Bin Laden has removed the focus from the unrest in the Middle East and North Africa. Violence continues – in the last 48 hours, tanks have entered a city to quell protests in Yemen, tanks have stormed into cities in Syria, Israel-Palestinian violence has erupted on one two three borders, while Libya’s biggest oil company has said oil production won’t be resumed until the war is over. And yet Bin Laden’s death marked the recent top in the market:  

WTI Crude Oil, Oct 2010 - present

Granted, there has been more to the crude sell-off in the last two weeks than just the unwinding of the risk premium (from global economic concerns, fundamental weakness in the US oil data, etc). But it has nonetheless played a significant part. The reality is that the MENA issue for the crude complex is gone but not forgotten, but not gone.

Finally, a double A-side which is set to be released next month: Summertime / Stormy Weather (= two issues set to spark some life into US natural gas in the coming months). Cooling demand will start to ramp up in June with the increase in absolute temperatures, while hurricane season is set to build up pressure (and fear and expectations…) steadily before its peak in early September.  

Cooling demand will start to ramp up soon...

But for now, as weather-driven demand reaches its low point for the year, there is a distinct lull in natural gas. This is not just a shoulder-month serenity, but also in part due to what was experienced last year. We are unlikely to see such extreme heat again this summer, hence we will see lower comparative demand and larger storage injections. On the flip-side, last year’s busy-yet-low-impact hurricane season may also be making the market somewhat complacent.  Nonetheless, this double A-side could be a real hit to natural gas prices, but a lack of heat / hurricane activity could leave prices ‘Stone Cold Dead in the Market’.

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