Saturday, January 22, 2011

10% Probability of $4.00 Retail Gas In 2011

During an economic recovery, future demand expectations trumps current supply data bidding up futures for crude and refined products. This is why the energy complex has been on a relentless upward trend for the past two years. Seasonal refinery output factors that normally temper price movements have had little effect this year. Why is this happening?

The simple answer is that speculators have gone all in on long positions, taking profits at resistance levels and then repositioning long trades at support levels. This has prevented any sustainable sell off. It has also positioned term structures to move from a well supplied backwardation market to a high demand contango market.

The EIA released gas supply data last week showing gas supplies have been steadily increasing. Despite the ample supply, they are giving a 10% probability that retail gas prices will hit $4.00 per gallon, with a 50% chance of gas prices hitting $3.50 per gallon in 2011.

One hope for consumers is that everyone is leaning heavily to one side of the ship. Should a major demand or several demand reducing events occur in 2011, there will be a lot of traders trying to exit through a small door at the same time. Such an event would be China overshooting on its attempts to dampen its inflation. Another listing of the ship event would be the failure of several Eurozone banks.

Since neither of these events are highly likely to occur, traders will not try to rock the boat and continue positioning for the likelihood of a continued bull market.

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