Gasoline and Crude on the Rise
Commodities / Crude Oil Jan 18, 2012 - 03:16 AM GMTBy: Jim_Farrish
$5 gasoline this summer -- fact or fiction? As we start a new year it is apparent that $3 gasoline is leaving, at least for now. The rise at the pump is to $3.39 per gallon according to AAA last week. Considering the average cost was down to $3.20 just three weeks ago, this is an increase of nearly 6%. Gasoline is up 30% versus a year ago according to the AAA data. What does all this mean and what is driving the price higher? Short term, there has been concern over the bantering with Iran and the threat to close the Strait of Hormuz. Some 17 million barrels per day passed through in 2011. Geopolitical risks are always present in the current era of the Mideast. Not to be outdone, Nigeria has seen strikes and protests over the weekend, adding to the pressure on oil prices. Thus, gasoline is on the rise... again. The following are some issues facing gas and potential reasons it may rise to $5 per gallon this summer.
Demand is the number one reason gasoline prices rise. Some believe the improving US economy will push demand higher during the peak driving period. While the economy is improving the current rate of growth isn't likely to produce any large increase on demand. One issue remains, inventory draw downs that took place during the Libyan civil war and production shut down. OPEC stated last month in their meeting that production levels would remain the same as Libya production comes back on line. Saudi Arabia additionally stated they would not reduce production going forward. Thus, there would be a surplus or higher production level when joined with the resumption of Lybia's production. Time will tell how this will work out relative to the excess production, or if the market will absorb the extra inventory with downward pressure on oil prices.
Emerging markets are another reason for rise in demand being viewed as an upside pressure on prices. The US refineries have increased their exports to emerging markets as the slowdown in the US economy has failed to consumer production. The primary benefactors of growth have been Brazil, China and India. The economic growth in those countries have slowed as well, but the demand for gasoline products remains on the rise. Thus, if things continue to improve in the US it will put pressure on the demand side for refineries which will result in pricing strength at the pump.
Speculation remains a big driver for the price of oil and gasoline. Some analyst are projecting $5 per gallon during the peak driving period. In the same vein their are analysts who are projecting a short term bump higher in prices, but a return near the $3 level heading into the summer months. This is the one driving factor for the commodity that is consistent... speculation on future prices. Only time will tell, but looking at a chart of UGA, United States Gasoline ETF since the low on December 16th of $45.44 the fund has risen to $50.08 or 10.2%. If the estimates are on target for the increase in prices, a rise to $53.30 could be the next move for the fund.
The bottom line for the price of gasoline and oil is volatility has become a staple for the commodity. Crude has moved from $75 per barrel in October to $99.65 currently. Hitting resistance near the $103.50 mark in November it has been in trading range for the last eight weeks. Watch the test at $97.60 support hit on Friday. If we break this level $93 comes back into play and if we hold the $103.50 mark is resistance. UGA broke the seven month downtrend line and is trading between the 200 day EMA and $50.80. If we find enough reasons to push higher the short term target would be $53.60.
Based on the current speculation in the sector anything is possible near term. This is a trading event versus a trend. That said, it may be developing into a trend changing event on the upside if the push higher follows through. Definitely worth putting on our watch list for opportunities up or down.
Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com. His primary goal is to educate people about investing. He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence. Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.
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Comments
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Earl Richards
18 Jan 12, 05:52 |
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