SPECIAL REPORT

by Scott Jones

Gasoline

May 2009

Last summer drivers were grappling with a serious issue—gasoline.  Actually the concern wasn’t so much about gasoline but rather the price at the pump.  $4.00 per gallon and higher had become the norm by early summer of 08’ and a by-product of the refining process, diesel, had made its way to more than $5.00 per gallon.  This time last year we all watched history in the making when light sweet crude prices made their move through $100/barrel and within a few months were seen nearing $150.00. 

Americans were used to filling their car’s gas tanks for less than the cost of a dinner out for four, and then, the price more than doubled sending the average fill-up to nearly $75.00.

We’re going to have shortages and prices are going to go up.  Gasoline is going to be extremely tight for us.  ~T. Boone Pickins

The price at the pump was obviously crimping some budgets.  With the daily media coverage on the TV, radio, internet, and newspapers there was no doubt.  It became a routine conversational topic among people in our hometown—everyone was talking about it including me.  And that is one of the great benefits of investing in commodities…events unfolding around us are the catalyst to major movement in the commodity markets.  It’s our awareness of these events that open up doors of unparalleled investment opportunity.

Recently in Northern Arizona, fueling stations have started raising prices at the pump.  One week ago a gallon of regular unleaded at a nearby neighborhood mini-mart could be purchased for $1.69.  This afternoon they had adjusted up to nearly $2.20.  When I asked about the almost 50¢ escalation the staff mentioned that conversion to “summer fuel” is to blame.  We all chuckled when the manager said, half in jest, “At least that’s what we’re being told.” 

The highest average prices at the pump for self serve

regular unleaded as of  May 17, 2009:

  Chicago IL  $2.63/gallon

Los Angeles, CA  $2.47

Long Island, NY  $2.44

And, the lowest:  Phoenix, AZ  $1.99

Whether we blame it on summer fuel conversion, the OPEC cartel, the government, some type of underlying manipulation or just good old-fashioned supply & demand issues the reality of the matter is that it is what it is. 

And it’s up to us to do our 30 minutes of study each day if we want to turn the tables on an event most people will be grumbling about from here to Labor Day.  In fact, this is the kind of event that fortunes are made from utilizing relatively small amounts of capital with little risk and high profit potential. (Complete details of the Buy Low—Sell High Trade setup are covered in the book, CHARTSMITH—Forging Your Financial Future) 

Seasonal Pattern

Unleaded gasoline is the world’s largest refined petroleum product, and accounts for roughly one half of the consumption of crude oil in the U.S.  By far the largest users of gasoline in this nation is individual drivers, which means supply and demand is strongly influenced by the driving season making demand for gasoline greatest from Memorial Day through Labor Day. 

In an effort to optimize, refineries find it necessary to retool each year between March and April, in anticipation of the increased demand for gasoline during the summer.  Retooling from heating oil to gasoline refining requires shutting down for one to two months, which reduces stock, creating a demand/supply imbalance.  The repetitive supply and demand issues create a strong tendency for Unleaded Gasoline’s price to rise around April and May and fall around September and October and continue to fall through the end of the year.

Contract Specs:  Gasoline Futures

1 Contract controls 42,000 gallons

Margin $9,450/$7,000

$1 move = $42,000.00

Daily Limit: 25¢

Trading decisions should not be made entirely on seasonal patterns.  Understanding these tendencies exist from time to time throughout the year gives us insight into timing our entry points more efficiently. 

Roadmap to Riches

I nearly laugh out loud every time I think of the story that was told in Jack Schwager’s book, Market Wizards, about the wise investment professor that would ask his students, “Where will market prices move to in the next few months?” When they answered by quoting some fundamental news headlines or some other media forecast this professor would jump up onto the top of a desk with a stack of price charts in his hand.  With all the students gazing up at him he would then throw the charts directly on the floor below the desk and yell, “It’s all right there!  Just read the charts and you’ll know where prices will be going next!”

His point was that supply and demand, big hand accumulation, seasonal behaviors, and just about every factor imaginable is already composed within the price bars on the charts.  This is why Shawna and I look forward to a cup of coffee and our 30 minutes of studying the online charts each afternoon.  The charts are literally roadmaps to riches!

The roadmap on gasoline futures is telling us something very important right now.  And, it’s not too late to do some studying of the chart formation that just recently shaped up the past few weeks and gave us buy signals across the board.  Take a look at the daily and weekly charts, invest a little time each day, and gain an understanding of what is taking place in a market that is going to either make people’s net worth go down (higher expenses), or add to their net worth (exponential profits!). 

If you haven’t decided to invest real money in the markets yet please be sure to paper trade this summer’s profit opportunity.  There will always be more investment opportunities developing and the more you know from studying and paper trading the more profits you’ll enjoy as time moves forward.

To your prosperity!

*For more information on how to trade in the commodity futures markets please refer to the book, CHARTSMITH-Forging Your Financial Future.