Welcome to the Friday edition of FutureSource.com's FastBreakTM.
Today's author is Phil Flynn. Phil is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. [more] |
Get daily research letters from Phil Flynn of Alaron FX
Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up
today. |
Gas Spec Wreck!
Learning How to Trade Gasoline Again in a World
With Changing Contract Specifications.
They say there are two seasons when you live in a big city: winter and road construction. Ahhh, yes. The signs of spring. Birds singing, flowers blooming and highways packed from coast to coast. What is more American than families taking to the open road to explore our land and exercise our freedom? Get in the car and drive!
Summer brings us a time to enjoy the fruits of our labor and most of the time we do so in our cars. What else is more American than going on a driving vacation and trying to make a profit from the traditional summer driving season? With visions of a Ford or Chevy driving down old Route 66, Americans love their cars and love to travel. And why not love to make a buck from all that traveling? It's all a part of Americana and a major driving factor in our US economy.
When it comes to futures traders, heaven forbid they should try to make a buck where there is a buck to be made! But some are confused on how to make a buck with all these changes. Over the years traders have made some big bucks by also taking advantage of the summer driving season. In fact a spring time rally in the unleaded gasoline futures contract has almost been as reliable an indicator that spring is here as seeing your first robin of the season. It has been so reliable an indicator at times that traders will sometimes wait all year just to make this one trade. And if they timed it right, it could pay off almost every time. The seasonal tendencies have been
very strong for unleaded gas. |
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According to Moore Research Center, the July unleaded gasoline contract went up between March 20th and May 17th 13 out of the last 14 years. The average profit per trade was $1,696.00. Traders buy gas because they can count on a surge in demand. Traders buy ahead of what they know will be an increase in demand from the winter into the summer driving season. But this year traders are not quite as certain it is so clear cut this year. There are changes on the horizon that at the very least will confuse the issue and perhaps make things a
bit more challenging. The changes are not a sign that spring will not come but a change in the makeup of the gasoline contract itself.
Over the years the make up of gasoline has changed. Recent changes in gasoline regulations have raised concerns among traders that the old reliable gasoline seasonal trade has changed. This favorite among traders, this old reliable, may in fact, be gone forever.
The internal combustion engine changed our world and made America a country on the move. But the downside was the exhaust from all those car engines stated to take its toll on the environment. Back in the old days, gasoline contained lead as an anti-knocking agent. Lead had to be added to the gasoline so the engine cylinder would not crack during the combustion process. Yet at the same time, by adding lead, the emissions from the exhaust became an environmental problem. In the 1950's the desire for more power and higher octane fuels caused an increase in the amount of lead in gasoline.
In response to the environmental concerns new unleaded fuels were introduced in the 1970s. Yet the need for anti-knocking additives as well as additives that would spew less pollution in the air became a priority. In 1990, the US Clean Air Act started forcing major compositional changes in gasoline. The goal was to increase the oxygen level in the exhaust and reduce harmful chemicals coming out of our nation's tail pipes. In response, oil companies added what was known as oxygenates. Oxygenates are pre-used hydrocarbons that actually contain oxygen. Not only do they provide an anti-knocking effect but they also add oxygen and reduce smog to our
atmosphere.
The two types of oxygenates that were created were ethanol and an additive known as MTBE (Methyl tertiary-butyl ether). MTBE became very popular because it was easy to make and it was processed out of natural gas by the oil companies. It was also cheaper and easier to transport. In fact MTBE was lauded in the 1990's as the savior to the environment. It was so widely used that the New York Mercantile Exchange unleaded gas contract was based on a type of gasoline that included MTBE and was delivered on the Colonial Pipeline from the New York Harbor. |
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Yet sometimes the road to Hades is paved with good intentions. As time went on it was discovered that even though MTBE did keep the air cleaner it had an opposite effect on the earth. It was discovered that if MTBE leaked out of an underground gas tank, it would pollute the ground-water. And once MTBE got into the water it was almost impossible to get out. So out goes one oxygenate and into another.
Last year a number of petroleum companies announced their intent to remove MTBE from their gasoline in 2006. The decision by these companies to eliminate MTBE was driven by State bans and the perceived potential for increased liability exposure. That exposure has made MTBE blended gasoline unpopular and many would rather just wash their hands of the stuff.
The Phase Out of MTBE has left oil traders with a lot of confusion. This Winter Colonial Pipeline announced it would stop shipping MTBE in March. Hedgers worried that the gas could not be delivered either because of pipeline issues or the perception that MTBE was a product no one wants to deal with. This caused NYMEX gasoline prices to plummet. Later it was announced that Colonial would allow MTBE to be shipped until May. This caused prices then to rally. Last Month Colonial reversed its position, and said it would allow MTBE unleaded gas to be shipped until MAY. Then the final blow came from the New York Merc itself when they announced they would no longer trade
the unleaded gas contract. What's a trader to do? No gas! Spring will never be the same!
Yet not to fear, there are new contracts that wait to take its place. But thus far for the average speculator and seasoned traders alike, these new contracts remain a mystery. And with this mystery comes a sense of excitement as new contracts have arrived to take the place of the old ones. The two contracts of note and the ones to watch will be traded at the New York Mercantile Exchange and the Chicago Board of Trade.
The New York Merc answered the call for a new gas contract with a new instrument they call RBOB. That is the reformulated gasoline blendstock for oxygen blending. That's quite a mouth full and understandable why they use a nickname! This new contract does away with the evil MTBE stuff and replaces it with ethanol. For those in the business the product contains 10% denatured fuel ethanol which is considered 92% pure as listed by the Colonial Pipeline for fungible F grade for sales in New York and New Jersey. RBOB is a wholesale non-oxygenated blendstock traded in the New York Harbor barge market that is ready for the addition of 10% ethanol at the truck
rack. |
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The plan for the New York Merc was to trade the two contracts old and new side by side. But recent events seems to suggest that the market is unsure it wants to hold contracts with the old MTBE as it's apparent this contract has seen better days. Already hedgers are leaving the old contract but have been slow to embrace the new RBOB. That uncertainty has caused wild swings in the old and the world's most popular but dying contract. The fears were brought to a head when Colonial Pipeline said they would stop shipping MTBE gas in March.
The announcement saw a big drop in the old unleaded gas contract. Then when Colonial Pipeline extended the time until May prices again rose. But later the AIG Dow Jones Commodity Index announced they would drop the old contract in its index and replace it with MTBE. This brought a renewed round of selling for the old contract. For he dgers it was confusing and for speculators it was almost impossible.
Speculators trading the RBOB are having a tough go of it. As of now they have not traded outright positions but only spread activity. The key for traders is how fast the new RBOB will pick up the majority of the old speculative business. For now speculators can't trade the old fashioned way of simple supply and demand fundamentals but now have to factor in the demise of a contract. Most believe that RBOB at some point will be a viable and welcome replacement for the old contract. But for this springtime seasonal trade we have more questions than answers. You can't just buy and wait. We now must see how the entire situation is going to play out.
And there are other factors as well. Rising oil prices and new technologies are bringing renewed interest in ethanol. One contract that seems to be gaining a foot hold is the ethanol contract at the Chicago Board of Trade. The explosive growth in ethanol production has brought this contract to life. So as we spring ahead we'll see trees start to bud and a new contract in ethanol bloom too.
The Chicago Board Of Trade Last Year launched contract with a display of GM's new flex fuel vehicles. They are vehicle's that are capable of running on regular gas but also on gas known as E85. E85 gas is 85% ethanol and 15% gasoline. Some believe that E85 gas is the near term answer to our dependence on foreign oil. The CBOT ethanol contract is 29,000 gallons, which is equivalent to 1 railcar or 2 corn contracts. (Hedging gasoline with corn, what a rush!) The ethanol contract can also be sold by those who want to add ethanol to any gas configuration. The Knock on ethanol has been that it takes more energy to produce ethanol than it produces or what they call a
negative energy balance. The American Coalition for Ethanol says those claims are outrageous. The bottom line is that it takes 35,000 BTUs of energy to turn a bushel of corn into a gallon of gasoline and that gallon contains at least 77,000 butt's In fact according to them every objective analysis of ethanol's energy balance done in the last 20 years shows Ethanol contains much more energy than it is to produce it. Not that the American Coalition for ethanol is biased. No not at all.
But despite the fact that Ethanol may have some disadvantages, what could be more American than gasoline and corn. Creating a fuel that is renewable and is grown in the good old USA as opposed to being pumped out of the volatile Middle east, should make this fuel extremely popular. And for Speculators it opens up a whole new world of possibilities. Instead of anticipating the summer driving season we can anticipate the spring planting season and the fall harvest as well. |
About
the Author
Phil Flynn is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry
executives, investors and media worldwide.
Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's
accurate and animated forecasts, analysis, speculative and hedging opportunities. |
For
Our Fast Break Readers
Get daily research letters from Phil Flynn of Alaron FX
Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up
today. |
Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
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Don't ever think that the market cant go any lower.....it can! What is cheap can get cheaper, Beware!
-Phil Flynn |
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