Oil beginning to threaten SIFs

I went to get gasoline today. Cost per gallon for 89 octane? $3.44. Now, something is very strange. When last oil was at these levels, I paid $3.75+ per gallon for the same octane. As oil prices changed, you would see gas station owners on their ladders changing the price of gasoline.

How can this be? Either:

1) Mobil has hedged their exposure to oil and locked in a price and passes that on to gas stations, or

2) We were robbed last time.

I should have driven around and seen if this is just mobil or all the other oil companies. Maybe it is refining and storage levels that affect gasoline prices more than crude/brent market prices? But on the other hand, that didn't seem to be the case last time? Something smells. This whole market is confused imo.

BTW, oil is nowhere near all time highs if you adjust for inflation. That would be about $102 per barrel in today dollars, set around 1980. In those days, Volcker set IRs at 13%.

I would be looking for a raise on Sep 18th if it weren't for the credit debacle. Of course, there is the theory that these inflation sensitive commodities are going higher anticipating the FED cut, so it may be the market itself that has created inflationary pressures, and not demand. Not only that, SPX would probably be a breath from 1600 were it not for the credit woes.

:confused: nitro :confused:
 
Actually the products don't trade in lockstep with crude. They have their own supply/demand considerations. The fluctuations of the products relative to the crude will determine refining margins.

I notice you didn't mention natural gas for instance, which had been trending lower for some time until just recently. We have huge stockpiles at this time in natural gas. And they build every week. NG isn't anywhere close to where it "should" be if we compared it with crude oil.

Gasoline on the other hand hit it's highs of 2.12 or so in early July when crude was in the low 70s (Oct contract). Crude went on to rally to it's highs around the start of August. By then, gasoline had declined about .18 or so from the highs, in part discounting the end of driving season probably. I wouldn't expect RBOB to be hitting new highs at this time of the year, and historically, it doesn't. We're well past the end of driving season at this point. We're now looking forward to the heating season.

By the way, watching the RBOB gasoline contract will help you to know what your gas station will be doing.

OldTrader
 
nice post OldTrader

separately,
I would be cautious here with long CL - imo the upside is limited (of course unless we get another hurricane). The next week's storage may not be that bad - we lost already 10mm barrels from Dean exactly as I predicted 4 weeks ago.
 
SIFs completely fixated on the expected rate cut and couldn't care an iota about oil. It will be interesting to see what happens if QM goes to $85, the markets gets it rate cut, and people wake up and see oil at $80 - $85.

Central Bankers Outside Of US (CBOOUS) are raising interest rates.

nitro
 
The Greenspan interview was very interesting. I agree with nearly everything he said, especially that over the short term markets will get over the credit woes, and that over the long term inflation is going to be our biggest threat. The only thing that I disagreed with is his time frame, I think inflation has already shown its ugly face, and while there are parts of the economy that seem to be immune to it, I see inflation problems everywhere _today_.

That said, one thing people don't take into consideration is the phenomenal rate at which we can adapt due to explosive scientific understanding. For example, I would not be surprised if in ten years all cars ran on hydrogen or on ethanol. Take any commodity and science could easily replace its use with other synthetic materials. So while I believe that raw commdoties, if nothing was done, would skyrocket in price if left on its own, people are fantastically adept at finding replacements. That is deflationary.

nitro
 
I wanted to break my thoughts today into two parts. The above post on the long term. This one on strategizing on what happens tomorrow.

Here is how I am going to play tomorrow after the FOMC decision. It is based on a very simple strategy. The one thing to me that will decide that course of SIFs is the reaction of currencies to whatever the FED does. I expect a .25 cut because that is what the market expects (even though I personally think the FED should hold steady), so I will base my strategy on that assumption.

We do not know what the dollar will do in reaction to this cut. It doesn't matter, we will react to whatever it does instead of predict what it will do. If the dollar reacts negatively to a .25 cut (note this analysis is based _only_ on a 25 cut since that is what is likely priced in) and weakens on a rate cut, I would be looking to sell ES and buy YM spread. That is on the theory that 90% of the DOW components derive their revenues internationally and a weakning dollar helps that. Further, a weakening dollar will likely mean that the markets don't believe the cut will save the US economy. Remember, in recent times, FED easing actions has strengthened the dollar, because most foreign economies were worse off than the US economies in those days, so the US was seen as a flight to safety. So if the dollar weakens, that "should" means ES is going to go down harder than YM, so that spread should widen to the negative side.

If the dollar strengthens, I am going to go long ES and short YM, on the exact opposite reasons given above.

Remember, the initial reaction will likely be down even though the cut is priced in, since the value of calls will likely need to be repriced by institutions that have not already taking into account lower interest rates. So it is possible that the market goes down and the dollar strengthens, initially. Pay attention to the dollar for strategy, and then you have to be a trader to implement a tactical entry. Since you are hedged, the losses or gains won't be spectacular, but that doesn't mean you don't need an exit plan.

nitro
 
People are fixated on ES and YM, but it is NQ that will go ballistic from here on to EOY.

ES is going higher on financials foaming over the steepening YC.

Merry Christmas from Bernanke.

nitro
 
Value of Wilshire 5000? ~ $19.1 Trillion.

Value of move yesterday? ~ $500 Billion.

Biggest % gain index? ER2 at close to +5%.

People don't realize that complexity of this situation. Many longer term rates are tied to LIBOR. If that spread widens on inflation fears, people with mortgage rates tied to LIBOR will be hurt because the long bond yields will rise. That is why I am extremely cautious on ES.

Therefore, the middle of the road bullish play is, I have a four letter word for you: TECH. That means ER2 and NQ. You can hedge one with the other, but I would hedge with YM. The ratio is everything...

The risk to ES is far too complex imo, since 20% of it is financials with direct exposure to the current situation. Everything looks rosy now, but what can go up 45 hadles in a day, can come down a lot faster and harder than that.

With all the precautions out of the way, SPX 1600 imminent, unless some untold exposure rears it's head. That is another ~ $500 billion dollars worth of buying.

nitro
 
Quote from dhpar:

ok - I take opposite side of the bet. We will see 80 before 60 (say on Dec contract). The reason is a tight supply + Jet is too north due to La Nina effects, i.e. more hurricanes into the Gulf (if they come). In fact I changed my position today to long CL - fingers crossed.
Only with Dean we lost 10mm barrels easy - where will we get it from?
More...

I win. :D
 
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