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This week’s Trader’s Corner revisits gasoline inventory and reviews why most propane retailers get burned by market hype.
In our first submission of this report for October, we discussed gasoline inventory. We discussed how declining inventory had pushed gasoline prices sharply higher. In that report, we focused on being careful about market hype.
We made the following statement as we set up the report: Basically we want you to see a more complete picture of the gasoline situation so you can make decisions with better information. To a large degree, that is what our company is all about – giving propane retailers more information than they get from “street hype” so they can make better decisions.
Further we stated concerning gasoline inventory: Falling inventories are not in themselves a reason to panic. There could be many reasons why inventory could fall. The time to panic is when supply is high and demand is still causing inventory to fall. In that case, you have true fundamental tightness and you should expect prices to firm as long as that condition exists. However, that may not be the case with gasoline now.
We went on to discuss how much spare import and production capacity there was for gasoline. Yes, inventory was tight, but it was more a function of producers responding to the difference in global energy prices and the U.S. market. With Brent crude running $23 per barrel more than WTI, there is a lot of incentive to reduce imports and live on domestic production and inventory as much as possible.
We used the analysis about gasoline and market hype to make a point to propane retailers. As a general rule, propane retailers are a buy-and-hold bunch. We tend to take a propane position and then forget about it. Unfortunately we also have a bad habit of buying when there is a lot of hype in the market.
Here is what we said to close that October report: Let’s use this situation to understand how most propane buyers are different from traders and how market hype can hurt us. The guys trading gasoline are real traders. They get in and out of the market at a minute’s notice. They will ride the gasoline hype for as long as they can, but when the hype is over they are out quickly and moving on to the next play.
However, as propane buyers, we tend to buy and hold. If we buy in a hype situation, we are often left holding the bag when it’s over. The traders who played the hype are counting profits, while we are left scratching our heads.
When the market is getting hyped up on something, try to learn as much as you can about what is behind it so you can make a better decision. There is no guarantee that gasoline won’t remain well supported. However, try not to make your decisions based on hype and emotion. Know the facts and hope for the best. If you make decisions not knowing the facts, you should probably prepare for the worst.
With that background in mind, let’s look at what happened following that report. Remember the report came right as RBOB gasoline hit $3.34 per gallon.
The price of RBOB dropped dramatically right after that report. Obviously the end of September saw tightness and generated buying pressure. A speculator will see that momentum in the market and buy into it. Speculative buying will exaggerate the effects of the underlying cause of the price change.
But the speculator is quick to sell his position at the first sign the momentum has changed. His selling will then exaggerate the downside movement. In fact, we can see that RBOB dropped from $3.34 to $2.80 and then had a rebound. It often happens when prices are moving quickly that the commodity gets oversold or overbought.
Let’s look at what happened to inventory after our report.
Right through the end of September we were reading market hype about doomsday for gasoline inventory. But look how quickly inventory recovered to about average. Suddenly the market was quiet about gasoline. Players had made their money and moved on to the next play.
There are plenty of lessons to be learned. Here is a list of a few:
1. Be careful of trading emotion and market hype, especially when the market is focused on only one part of the overall supply/demand equation.
2. Be particularly careful during seemingly unexplainable price movements near the end of a month or near contract expirations.
3. If you buy during market hype, don’t forget about the position. Don’t hesitate to sell if upward momentum breaks.
4. In a sharp decline, the market will often oversell, creating a good buying opportunity for those who are vigilant in watching the market during this time.
5. Break the cycle of buying under pressure.
6. Look for buying opportunities when the market is moving in your favor.
7. Try to become the one who profits when the market is getting overhyped.
8. If you hold a supply position and haven’t sold against it, you are speculating anyway, so don’t be scared to take a profit when the market hands it to you.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at firstname.lastname@example.org.
WEEK IN REVIEW
Crude was down early week on worries about Greek and U.S. debt. But the second half of the week belonged to the bulls, with tensions in the Middle East that threaten supply and some marginal progress on U.S. budget negotiations providing the support.
Propane is not supported fundamentally and is finding a hard time ending its price decline.
It seemed Belvieu was trying to put in a price floor the last couple of days. Crude had a strong close, but it could have been short covering on word Israel was going to build houses in a contested area of the West Bank. The latest comments from politicians on the budget negotiations will continue to push markets around. We will begin the week neutral.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Belvieu propane continued to show weakness coming out of the holiday. Markets were hampered on worries created when lenders of bailout money to the Greek government could not agree on releasing the next round of payments.
Tuesday: Belvieu remained firmly in its downtrend, while Conway posted a small gain. Crude was down despite a deal getting done on the Greek loans. Worries about the U.S. debt crisis and a reduction in next year’s global growth forecast by the Organization for Economic Cooperation and Development tempered traders’ enthusiasm.
Wednesday: The EIA reported a small build in U.S. propane inventories, sending prices lower. Comments by House Speaker John Boehner, the leading Republican in Washington, that he was confident a deal to avoid the fiscal cliff could be done by year’s end encouraged risk taking by investors. Commodities and equities markets moved higher as a result.
Thursday: Propane prices turned higher in a volatile day of trade. A strong rally in crude followed comments by President Obama that he felt confident a deal on the fiscal crisis could be done by Christmas. Markets built on the momentum from Boehner’s comments on Wednesday.
Friday: Crude pushed higher again, threatening to re-establish its uptrend even as equities markets struggled to gain traction. Boehner stated there was little progress on the budget talks and expressed disappointment in a plan presented by the White House that focused mainly on increased taxes and very little on cutting government spending. Belvieu showed more signs of finding a price floor.