Matt Insley

“Tough noogies” is where we left off.

A few months ago, back in September, we discussed the likely path for gasoline prices. In short, new dynamics in the refining industry – as well as a few obvious factors like the price of crude – are leading to a new “crude” reality for American motorists.

Unfortunately, this new reality isn’t going to lead to lower gasoline prices. Instead, when refiners win, you and I lose. (Hence the “tough noogies.”)

What gives? And how can you stay ahead of the pack on this one? Let’s have at it…

Today, I don’t need to tell you local gas prices are headed higher.

Take a look at your neighborhood sign, or the print out at the pump and you’ll see that, lately, prices made a mysterious jump. Indeed, what was a $3.25 fill-up earlier this year is now closer to $3.50 – heck if you live in California, Chicago or New York prices are likely much higher.

From Detroit to Philly, New York to LA, the price of gasoline took a sharp turn higher last week. The average price jump was 17 cents, according to the AAA. But in some areas, like Detroit, prices rose as much as 30 cents.

That’s too much for many motorists to digest in just seven days, but as you’ll see it’s all part of the same storyline we broke to you a few months ago. There’s a profitable way to play it, too!

First let’s recap the basics, though. There are two factors influencing the price of gasoline that any analyst worth his weight can tell you: the price of crude and refinery economics.

Sure, crude is a leading indicator for gasoline prices. When the black goo rises, it’s only natural that gasoline prices follow. And for much of the last three years that’s been exactly the case.

In the chart below you’ll see the price of gasoline and the price of crude, but you’ll also notice a rare divergence in the past six months:

Looking at the right end of the chart, you can tell something is fishy. Gasoline prices have started to play a new game – it’s a crude awakening for Americans, too.

Sure, a general rise in crude prices has something to do with gasoline prices – but the fishiness has to do with the second part of the gasoline price equation: refiners.

The quick answer for the blip higher is that refiners have shut down to start gearing up for their summer blend-stock. Lower refining. Higher prices.

Although that gives more credence to the jump in gasoline prices, it does NOT account for that fishy gap that’s formed in the chart above. Indeed, there’s a premium price being charged for fuel.

So, what’s causing the unusual premium in prices?

It’s the same conclusion we came to a few months ago: U.S./global economics are creating an opportunity for refiners to sell their product on the world market.

So instead of taking discounted U.S. crude and refining it with discounted natural gas (both discounts coming from the U.S. shale boom) and keeping prices locally low, refiners have the ability to sell their product on a global market.

How much exporting are we talking about? Take a look:

This petroleum product export trend is really starting to take off – even since our first write-up a few months ago. Since then, exports have headed higher, by more than 200,000 barrels per day.

Ah, vindication! And here’s the real kicker…

Looking back at the refiner plays we discussed in September – Alon USA Energy (ALJ), HollyFrontier Corp (HFC), Tesoro (TSO), Valero (VLO), Western Refining (WNR), Phillips 66 (PSX), Marathon Petroleum (MPC) – every single one is up more than 25%, a few are up over 45%. That’s like the opposite of catching a falling knife!

Add it all up and our thesis is intact. Gasoline prices are up for the regular reasons – crude oil prices and refinery shut downs – but the “fishy” new reason for higher prices gets back to this refiner/export scenario. The price action in the sector proves it.

Looking forward, as long as the shale boom keeps prices at a discount, we should see resilient exports for petroleum products, like gasoline. And although it’s good for refiners it’s going to keep those prices you pay at the pump stubbornly high.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter 

Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

  • earlrichards

    Google the “$2.5 Trillion Oil Scam-slideshare” and google the “Global Oil Scam.” The US is a victim of this scam. Plug your electric car into your household, solar power battery.

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