Gasoline Prices: Conspiracy Theory Running on Empty
Recently there's been quite a bit of Internet and blog-based discussion on what some suggest may be a pre-election conspiracy theory to bring down the price of gasoline. Sure enough a couple of days ago I noticed a nice short covering rally in the gas futures in spite of much greater gasoline inventory data. See the chart below.
Also see the inventory estimate comparisons below.
What's interesting is the spike in inventories this week, which represent the highest inventory levels since just after 9/11. Clearly a big import number but also the seasonality of this number could have been exacerbated by a weaker than expected storm season as well as potentially increased hedge fund trading activity in these markets of late.
The latest report from the CFTC showed the net longs of the non commercial (speculators) players of just 18 mln where the average is typically 55 mln. Goldman noted to me that during an economic environment such as this, net long positions would have indicated a net long position of 90 mln, so the conclusion is that there are either fewer speculators or a greater number of shorts.
To address the report below, Goldman officially announced its reconstitution for the Goldman Sachs Commodity Index (GSCI) back in June for the rolling off its Unleaded Gas contract. As part of that press release, the GSCI said it was acting in response to the transition on NYMEX from the New York Harbor Unleaded Gasoline ("HU") futures contract to the Reformulated Gasoline Blendstock for Oxygen Blending ("RBOB") futures contract. While the contracts affected began with the August roll period, the futures contract rallied more than 10% post the press release. I'm guessing there might have been several other factors involved with the August decline.
RBOB conforms to newer industry standards for reformulated regular gasoline blendstock for blending with 10% denatured fuel ethanol whereas the old unleaded contract did not and consequently is getting phased out. The committee decided to amend the GSCI by rolling 1/3 of the overall weighting in each of the last 3 months leading into Oct/Nov transition. The unleaded contract weighting will ultimately fall from roughly 7% to 2.3% on a dollar weighted basis with the remaining %, nearly 5% split up between Crude and Heating oil. Why just 1/3 of its previous size? This is mostly because of the illiquidity surrounding this new contract according to the operating committee at the GSCI and not a covert effort by the government to drive gasoline prices down. Currently the total open interest is nearly 40% greater in the RBOB than the Unleaded contract and in light of the portion rolling over, confirming the roll is near complete.
I believe these reasons, more than the conspiracy theories of government manipulation is more to blame here than some politicians trying to win their seats back.
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