Tag: contracts

Something Different: Commodity-based ETFs

In this post, I am going to address a different topic related to speculating about gas prices:  Commodity-based ETF’s.  Early this year, I was posting about the US Gasoline Fund ETF (ticker symbol:  UGA).  If you have a strong opinion about gas prices, you could use this ETF to make money.  Except there are some unexpected tax consequences that I learned about recently due to a short-term “investment” of mine in an agricultural ETF called DBA.

Commodity and currency ETF’s make or lose money by investing in contracts (such as the NYMEX gasoline contracts).  They are treated as “pass through” corporations meaning that the expenses and profits of the corporation are passed on to the owners for tax purposes. So, instead of the ETF paying income tax on its profits in these contracts, if you own some ETF shares, you do!  At the end of the year, you get a K1 form that says, “Your share of the profits this year is $600.”  You have to fill out an extra tax form for this and declare it as income.  If the ETF lost money, then you get a write-off you can use.  This is all independent of the price of the ETF or any dividend payments.

Regular stocks don’t work this way.  If you buy shares in IBM, then IBM deals with these types of profits and losses, and you only have to worry about how the price per share has varied, and dividends.

For me, the upshot is that as much as I might want to buy UGA each December and hold it until August, I don’t want to deal with all of nonsense that goes with it.  But looking back over the decade, that has been a good trade most years.

Disclaimer: None of this should be considered tax advice.  I don’t have any financial interest (long or short or anything else) in UGA.

A quiet start to the week

After a wild week last week, we should settle down. Markets were down overnight on renewed fears that the economy won’t heat up for years and that the DOW will drop below 7,000 for the first time in over a decade. These fears are causing oil and gasoline contracts to trade lower this morning, leading to lower wholesale prices.

Speedway finally reset this past weekend to $1.99, but it definitely wasn’t very uniform.

I see a quiet start to this week with prices remaining steady (at most falling a penny or two).

80 million barrels of oil floating in the ocean, owners betting and hoping for higher prices

Just to warn you, this post will be a bit lengthy, but may be incredibly insightful for some. First off, it looks like Ed has predicted a hike to $1.99. We’ll see if he’s right on… if you can get gas for around $1.80, fill up like I did tonight just in case. I’m not completely sold on a price hike, but we will see what happens.

Now to explain my post title. Was there a ship leak or some accident? No. There ARE 80 million barrels of oil floating on the sea protected by a thin layer of steel, sitting in huge supertankers. According to Bloomberg, Frontline Ltd., the world’s biggest owner of said tankers has made this claim. It would be the most oil stored at sea in 20 years, as traders seek to cash in on higher prices later in the year.

This is an idea that carries a good amount of risk if you ask me… but you don’t make money without risk. Oil prices haven’t really started a good climb yet this year, and prices have largely given up most of their gains they made the last two weeks. These supertankers are huge ships that cost large amounts of money to lease but some can hold well over a million barrels of oil. If prices jump $10/bbl, there’s a large amount to be gained. However, with oil supplies in Cushing, Oklahoma nearly at capacity (the delivery point for contracts traded on the NYMEX), what’s going to happen? We’re already awash in oil, sitting nearly 40 million barrels above where we were JUST LAST YEAR! Crude oil in storage this week, as reported by the DOE, was 326.6 million barrels. Like I said, storage in Cushing, OK, was at 33 million barrels, with capacity of 34 million barrels. This represents a 20% GAIN in oil inventories there in just 4 WEEKS! How are these traders betting on higher prices in a few months when we’re lush with oil in a recession?

Figuring those 80 million barrels could go anywhere in the world, let’s figure half goes to the U.S., the world’s leading consumer of oil. If that 40 million barrels (which is doing nothing) would eventually end up at U.S. ports in a few weeks, we could have the most oil in storage since September 21, 1990!
Even WITHOUT the 40 million barrels, we’re already at our highest level of storage for a January since 1999, when demand was strong and the economy was surging ahead… remember the .com era? So many startup companies… and to see us at the same level of oil now with a much different outlook?

Let’s throw a name out here… a banking company that used to actively trade oil contracts (and bet on higher prices). Remember Goldman Sachs? The company whose analysts predicted $150 oil? What ever happened to them? They seem to have gotten out of the oil trading business. Goldman is now forecasting oil prices in the $30’s for quite some time. Do they have any obvious interests in oil now? Not that I can see- and crazy enough they’re actually making some sense with their seemingly non-biased oil price forecasts!

What’s this all got to do with gas prices?

Lets think it over. I’ll even format it so it’s easy to read:

  • U.S. January oil inventories highest since 1999 and economic outlook is much worse than that of 1999
  • 80 million barrels of crude oil haven’t even hit the market, owners betting on higher prices
  • Gasoline inventories healthy
  • Excluding 2006 and two weeks in 2007, oil inventories (including SPR) are at their highest levels EVER
  • Gasoline demand down 3-4%
  • Diesel demand down 4-5%
  • Jet fuel demand down 12-15%
  • OPEC countries need to pump more to generate revenues
  • Refinery utilization at just 85% and we’re still putting plenty of gasoline into storage

Point is-with such great news on the shape of oil inventories, how can oil and/or gasoline make a spring run-up in prices? Ed’s bet that we’d see $2 gas before we saw $1 gas is nearly the OFFICIAL winner, but I still think prices have more room to fall.

My short-term bet on oil (the next two months) is that prices fluctuate between $30-$45, but we may briefly break the $30 barrier. A gasoline prediction? I’ve already had that bet with Ed. Once he wins, MAYBE I’ll make another prediction.

Patrick

Why aren’t gas prices lower?

Tuesday, October 21, 2008, 9:20 AM:  The following question has been posed to me several times the past month:  On July 15, oil was at $145 a barrel, and gasoline cost $4.25 a gallon at the pump in Grand Rapids.  Last week, oil was $72 a barrel, and gasoline cost $2.96 a gallon.  If the price of oil has been cut in half, why hasn’t the price of gas followed suit?

There are a few reasons for this, that I will try to explain.

1.  NYMEX.  Oil and gasoline futures are traded on the NYMEX, a public market with prices available for all to see.  The price of these future contracts helps set what is called the “spot” price, which is what is actually charged when real oil or gasoline changes hands at the wholesale level.  Sales and other taxes are not included in the NYMEX prices.  Looking at these futures prices, both oil and gasoline has dropped approximately 50%, so at least at the NYMEX level, these prices are correlated.

2.  Taxes.  There are three taxes applied to the wholesale price:  the federal gas tax of 18.4 cents per gallon, the state gas tax of 19 cents per gallon, and the sales tax of 6%.  So, that’s at least 50 cents of the retail price that is taxes, regardless of the wholesale price (except for the sales tax, of course).  In the past three months, those taxes have not been cut in half, so it would be hard for the retail price to drop 50%.

3.  Chicago Summer Premium.  I coined this term a few years ago to describe how, during the summer months, the wholesale price in the Midwest is usually higher than the price based on NYMEX.  The reasons for this have to do with reformulated gasoline, variations in supply and demand, and some other mysteries I’ve never solved.  A way to monitor this premium is to look at the wholesale numbers for selected Midwest cities that are posted on AXXIS.  The NYMEX/AXXIS difference was 20 cents on July 15, over a dollar in mid-September when Hurricane Ike struck, and is currently still 41 cents.  The AXXIS price has not dropped in half the past three months, and this may still be a hangover from the hurricanes.  It is also the first place I would look for gas gouging if I was the Attorney General.

4.  The Dynamics of the Retail Market.  As a journalist said to me last week, “Up like a rocket, down like a feather.”  We’ve documented time and again on this site how this works, with the big price hikes followed by the gentle day-to-day drops, while the wholesale price fluctuates in the background.  Our last price hike was during the September 12-14 weekend, when prices got up to $4.29 on 28th street.  Since then, the drops have been slow but sure — some days one or two cents, other days seven or eight cents.  In an area where there are several stations, one station decides to drop their prices a few cents because a cheaper shipment came in that day, and the other stations follow suit.  The point is that the retailers aren’t setting their prices based on trading on NYMEX.  They are setting it based on their costs, what their competitors are doing, and what sort of business they are getting.  Are the retailers making extra money right now?  I doubt it, as our monitoring indicates they are still dealing with high wholesale prices in the Midwest, and some of the gas in their tanks cost them $2.95 a gallon last week.  But prices continue to fall, slowly but surely.

All this leads to my latest prediction:  It looks to me like the chaos on Wall Street is dissipating, so energy prices are starting to stabilize.  I expect Speedway and friends will decide it is time to straighten up their prices, with a reset by the end of the week to $2.89.

Dow rises 900 points, gasoline rises as well.. hike soon!

As of late, oil and gasoline have been virtually tied to the Dow as we look to economic woes as reasons to sell-off gasoline and oil contracts. With the Dow finally putting together a noteworthy rally, gasoline and oil both surged.

With a gain in wholesale prices along with much tighter Midwest supplies, we can expect our first price hike in weeks. The tightness in supplies is mainly due to refinery woes later this summer, combined with planned fall maintenance led to a large loss in inventories. Usually when this happens, refiners will direct products to the Midwest to take advantage of larger margins. However, coupled with Gustav and Ike, refiners were too busy directing fuel at the South, especially TN and GA as large shortages increased margins.

Fuel out of Chicago is now pegged roughly 40-cents over the NYMEX trading price, bringing us to a $2.35 wholesale cost before shipping and taxes.

I would fuel up very soon and take advantage of anything under $3, knowing that a hike would be to $3.19-$3.29.

Hopefully this is temporary, but we’ll find out.

Patrick

Are Oil Prices Rigged?

You know that part of the intellectual basis for The Gas Game is to use energy prices on future markets to approximate wholesale prices and then try to predict what is going to happen to retail prices. Following the futures markets have always made me wonder if they are manipulated, or perhaps the better word is abused.  The abuse is that traders buy and sell futures contracts — paper gasoline — but have no interest in real gasoline.  When the contracts come due, they “roll them over” to another month, rather than deliver the gasoline or take delivery.  Some of this is OK with me — I’ve played the stock market a bit — but I’ve read articles that suggests that this speculation has distorted those markets.

A few weeks ago, I read this article in Time magazine that makes that case that it is quite possible that those markets are distorted, because there really isn’t a lot of money being exchanged on NYMEX.  Key quote:  “The point is, it would only take about $9 billion to control the entire long position in oil. That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion. No, we’re not implicating any of these guys in market rigging; in fact the list of billionaires with that kind of swag is long. The point is that anyone in that category could clearly handle the risks of the oil  futures market, and they might even be willing to take delivery on oil.”

Given that the U.S. government is throwing $700 billion around this weekend (and that’s a whole different story), $9 billion just seems like a rounding error.

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