Gasoline Prices WTF?

Previously, I have mentioned rising gasoline prices both here and on LinkedIn.  It is now a story on the major news outlets and you are probably painfully aware of it.  The chart below shows this year's price increase compared to the last two years.  You can see we are already fast approaching the peak prices of the prior two years.

Source: AAA.com

Since we are still below the prior peaks, if you were wondering why it feels so bad, the chart below may help put things in perspective:

Source: Global Macro Monitor

Except for 2008 (which was no picnic with over $4 a gallon gasoline), this is the highest estimated percentage of mean household income we have spent on gasoline since the early 1980's.  If you are wondering why this is happening, it is a combination of things.  Below is a chart of what makes up the price at the pump:



Source: US Energy Information Administration

As you can see, two thirds of the price is based on crude oil.  Both global benchmark crude oil prices (North Sea Brent and West Texas Intermediate) have moved up since December, explaining much, but not all of the increase in gasoline prices.

Some of it is because inventories have been constrained due to lingering effects from Superstorm Sandy.  The rest comes from the smallest percentage piece, the refining part.  Over the last few years, approximately 1 million barrels of refining capacity on the East Coast and St. Croix has been shut down.  In addition, this January Hess announced plans to close its Port Reading NJ refinery.  (More pieces on this are here and here.)  This is on top of seasonal refinery shutdowns to switch over to summer blend gasoline, which is happening earlier than usual.  This has combined to start off the usual increase into the summer driving season in February instead of March.  If the experts are right, the price should top off around the same level as the last two years, just a lot sooner.

 

 

 

Pre Mardi Gras Weekend Update

Pitchers and catchers were officially supposed to report today for the Cubs, Indians, Rockies and Red Sox.  For many it is the start of a new season.  The Super Bowl is over and now on to baseball (with a little thing called March Madness in there too).  In the Chinese calendar, it is the start of the new year (Snake).  The markets seem to be turning towards a new season also.  Year to date, stock markets are generally up and Treasury bond prices are down.  The Fed seems to be succeeding in pushing investors out on the risk curve as funds are flowing into equities and out of money markets for the first time in years. 

 

While the S&P500 Index managed to eek out a small gain on the back of some positive economic news, most major international markets were down for the week.  European stock markets, and the euro, dropped after ECB President Mario Draghi said the exchange rate was important for growth.  Corruption allegations against Spain's Prime Minister Rajoy and the possibility of a hung parliament in Italy also fueled the downdraft. 

 

This coming week is a slow one:

 

• Tuesday - State of the Union address, UK PPI, CPI
• Wednesday - US retail sales and EMU industrial production
• Thursday - French, German and Italian GDP
• Friday - US industrial production

With earnings growth minimal, the recent rise in the market has been accomplished through increasing valuations.  The S&P 500 Index is approaching the upper end of its recent valuation range on a P/E basis, while the Price to Sales ratio is approaching pre crash 2008 levels.  Market confidence remains high even as the US average gasoline price has reached $3.54 a gallon and is over $4.00 a gallon in parts of Southern California.  While the fiscal cliff was avoided, most consumers are facing a decrease in take home pay as the temporary 2% reduction in Social Security taxes of the last two years expired.  In addition, many expect that the mandatory sequester cuts will now take place on March first, further slowing the economy.  While these factors should not push the economy into recession, they should also not be a valuation expanding event.  At the very least, they're definitely not helping the situation.

 

So why is the US market rising?  That would be the wave of liquidity we mentioned in Anecdotes vs the Fed.  This is an exhilarating and dangerous ride that can last longer than you think.  It can also crash down very hard on the unskilled and unwary.  So know what your plan is and in the meantime, don't fight the Fed and as they say in New Orleans:

Laissez Les Bons Temps Rouler*

 

*Let the good times roll



Note: The original post had the wrong week's international data announcements.  This is now corrected.  I apologize for the mistake.