ENERGY STRATEGIES
In looking ahead to the summer gasoline situation, it might be important to take a quick look back to quantify the fundamental developments that have occurred since last summer's top in prices. In the wake of the 2006 high, it is clear that demand was indeed trimmed and that by last October the US saw its supply of crude oil stocks reach a rather burdensome surplus of 23 million barrels. However, despite the fact that North America saw the warmest early winter in history, US crude oil stocks fell back into a deficit reading by mid December. Since January lows, the oil market still hasn't giving OPEC that much credit for reducing supply. That situation could become increasingly more important in the months ahead, especially if the slowing pattern in the US economy continues to unfold. Given the fundamental sentiment that was in place going into the January lows, one would have expected a massive supply surplus or overhang to have manifested itself in US product stocks in the face of the warm winter start, but that just did not happen. Subsequently, the market has seen a pretty impressive recovery in winter heating demand and has also seen a long pattern of low refinery operating rates. In fact, we think the EIA's recent note that total 2006 US oil use declined but that both gasoline and distillate use managed to post new records is clearly a sign that use for the final energy products remains strong, even if the US refinery effort has once again failed to meet the call. If one looks at the enclosed chart of the current US refinery operating rate and one compares it to the 5 year average, it is clear that refiners are characteristically running lower rates or, as some analysts have suggested, that some refineries have actually pulled off early seasonal maintenance. In looking at comparisons of implied gasoline demand in 2007 versus the prior year and the 5 year average (see enclosed chart), it is also clear that gasoline demand is running moderately above the average and is holding at very lofty levels when one considers that the US economy has supposedly been slowing for the last month and a half.
Global demand for gasoline could also come into play this summer. Despite jitters over a possible slowdown in China's economy, the number of private car owners rose 33.5% in 2006 vs. 2005, and gasoline exports shrank to 2.9% in January from year ago. This raises speculation China will become a net importer of gasoline this year, which could further tighten the global supply outlook. China's gasoline situation is changing very quickly, as prior to last year China was Asia's largest spot gasoline exporter. Therefore, there is certainly justification for higher gasoline prices into the summer.
In the end, seeing refiners running at lower rates, demand running above normal and US gasoline stocks running at a 8.6 million barrel annual deficit would seem to suggest that the energy complex is set to start the summer 2007 gasoline season out on a relatively tight footing. If China becomes a net importer of gasoline this year, that will add a whole new demand dynamic to the equation. Countervailing part of the bullish story in gasoline for the summer of 2007 is the EIA prediction that ethanol supply will be significantly more robust in the coming summer period. In short, we think that the energy complex is set for a bullish bias into the spring and summer of 2007 but that massive gains might not be seen without a fresh and serious global supply setback. In other words, traders should concentrate on buying May and June gasoline on setbacks to consolidation support of 180.00 to 178.00, looking for the market to take out the early March highs of 192.60.
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