Oil’s Spike Will Kill The Consumer

Consumers are about to enter the prime driving season, which means the price of gas is going to rise.

Unfortunately, that’s the only real reason for gas to rise, because all the other data would say it shouldn’t. Gasoline demand is down year over year and inventories are at 20 year highs. Yet, traders who are excited by the spike aren’t going to give up on their gains, for fear that the season ahead will drive prices upward.

Well that’s a vicious cycle because the lifted price of oil and gas is going to kill the consumer. And when the consumer dies, eventually it catches up with the trader.

The Pragmatic Capitalist: The relentless rally in oil and gas continues this week as oil prices spike over $60 and gasoline prices jump over $2.30. Many investors are celebrating this as a “green shoot” and attributing it to increased global demand & a sign that the Fed’s reflation efforts are working, but the underlying data seems to conflict with this notion. Much like the housing situation there are very strong seasonal trends at work here. Combined with record government stimulus and a Chinese government is diversifying out of dollars and into tangible assets and you have a recipe for a market that is not entirely representative of true global economic strength, but temporary trends.

Yesterday’s EIA report showed a 1.2% decline in gasoline demand year over year. Recent refinery data reported capacity at just 82% – a clear sign of an inventory glut. Meanwhile, crude oil inventories are near 20 year highs and demand is at 10 year lows.

Much like the spring buying season in housing (that I believe is causing a false dawn in home prices), there are strong seasonal trends at work in the oil and gas markets. Gasoline has a tendency to rally into the July 4th holiday as winter cold gives way to summer driving season. As a trader, it’s hard to part with shares or contracts at low prices before this important seasonal turning point so the buyers and reluctant sellers compound the price increases. The energy and industrial complex now make up almost 30% of the S&P 500 ( .SPX-E 903.47 ↓0.51%). Falling oil prices would likely crush stock indices. We can’t be certain that oil and gasoline prices will continue to follow this seasonal trend into the July 4th holiday, but we can be certain that, with consumers losing 600,000 jobs per month, facing reduced wages and increased pain at the pump, this green shoot is sprouting some very prickly thorns.