When will gas prices drop?

Wall Street is looking for cheaper prices at the pump, eventually.

By Anthony Mirhaydari Apr 20, 2012 3:03PM

Image: Buying gas (© moodboard/Corbis/Corbis)Despite some stalling of economic momentum, weaker data at home and overseas, and a big building of oil inventories, gasoline prices remain irritatingly high -- down 8.6% from their high earlier this month but still up nearly 30% from November's lows. That continues to weigh on consumers, pulling down real wages in three of the last four months and forcing folks to tap into savings to maintain their spending.

 

Obviously, that's not good. Nor is it sustainable. Something's got to give. Either wages accelerate (unlikely), gas supplies jump (also unlikely due to refinery closures) or the economy stagnates, pulling down energy demand (very likely).

 

This is the scenario the analysts at Bank of America Merrill Lynch are looking for. But first, upside risks remain as gas reserves are low. That sets the stage for a potential summertime surge before prices cool. Here's why.

 

 

The problem is manifold:

 

*The combination of refinery closures and outages has sharply cut the supply of gas in the Atlantic Basin over the last few weeks.

 

*Demand for fuels remained high due to sustained strength from the emerging market economies and an early first-quarter boost in U.S. economic activity.

 

*U.S. gas imports sluggish due to European refinery bottlenecks. Statoil said it could close its 200k barrel-per-day Mongstad refinery due to overcapacity.


And now, new problems are coming into focus:

 

*Inventories are low and the switch to summer fuel formulations means that tightness in the Atlantic Basin market isn't going to ease.

 

*European supply continues to flow towards Asia.

 

The wild cards are any unplanned refinery outages, tensions in the Persian Gulf (from Iran or Bahrain), or a surprise announcement of additional monetary policy easing out of the Federal Reserve at its meeting next week. An announcement from the Fed, if it happened, weaken the dollar, boost crude prices, and send gas prices moving higher once more.

 

 

Another catalyst to watch is the rebound in U.S. gas demand as travelers rev up for the summer driving season. The team at Merrill Lynch doesn't think this can last, since "demand will likely have to continue to adjust lower, helped by high prices."

 

By mid-summer, the situation should ease. Demand should drop off again. European refineries will be coming out of maintenance periods. Three of Petroplus' facilities will start up again, including Antwerp and Petit Couronne. And the recent tightness has boosted refining margins, encouraging producers to increase output.

 

Long story short: Higher gas prices aren't going anywhere anytime soon.

 

 

For investors, the energy sector has been an attractive source of short profits since late February as the sector tripped down into a period of underperformance against the overall market. Since then, the Energy SPDR (XLE) has lost more than 9% while the S&P 500 has remained flat.

 

With demand rebounding a little and refinery margins up, I want to cover my energy shorts in the Edge Letter Sample Portfolio. I am covering Basic Energy Services (BAS) for a 23% gain since late March, ConocoPhilips (COP) for a 3.3% gain, PennWest Energy (PWE) for a 16.5% gain, and selling the Direxion 3x Energy Bear (ERY) for a 14.6% gain.

 

New opportunities are popping up in the financial sector, the subject of my last post.

 

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

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10Comments
Apr 20, 2012 3:47PM
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What will actually happen with prices is this:

the prices will fall about a month before the november elections and the demos will take credit for it to boost their failing leader and his agenda.

Apr 20, 2012 4:26PM
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Obviously neneedthetruth didn't read the article.  Let me make it simple for you. "Overseas demand, closed refineries, increase in summer driving, speculators in the market." There, now do you get it?
Apr 20, 2012 5:23PM
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Once again we are fed the same old line of BS: supply is down, demand is up.  At the global level, the price of gas is being impacted by market speculators operating in the derivatives market, not supply and demand.  At the local level you have an oligopoly, or few suppliers, market which also does not obey classic supply and demand.  When you have an oligopoly, the market price is somewhat fixed by collusion of the suppliers.  If one tries to raise their prices, either all of them will raise their prices and it will stick, or the one who tries will be forced to lower their prices.  It is the same mechanism at work in things like airline tickets. 

At the pump / consumer level, the prices should only be adjusted in response to supply deliveries.  The fact that the prices go up 5 to 10 cents at a time, even several times a day and then down by 1 to 2 cents at a time over the course of weeks also tells you that the station operators are profiteering off of this artificial volatility. 

It is just one more way to screw more money out of the American consumer and it won't stop until were all broke.

Apr 20, 2012 5:05PM
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Ever since Mr Clinton was influenced by Enron to allow energy speculation, our energy prices have been left unprotected and open to speculation and manipulation. Government knows that there is not perfect competition involved in the speculation, but does nothing about it. When will prices drop? When Big Business tells the government to protect energy prices from speculation and manipulation once again, or when government enacts actually effective measures and enforces them. When will this be? I believe never.
Apr 20, 2012 5:02PM
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It should be nationalized. No corporation should own the worlds resources. They can make money getting paid to drill, but no ownership that puts a strangle hold on the entire world.

Apr 20, 2012 4:43PM
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I just came back from Germany, where unleaded was selling for 1.52 per liter, or $5.62 a gallon, nowhere near the 8 or 9 bucks that Sprues 2 has invented as the price of gas in Europe, and not that far from what people in California or the East coast are paying here.  .sprues2 wrong, Recondo right.
Apr 20, 2012 5:46PM
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and if prices dont go down oblama will blame bush/republicans cause oblama is like a female everything is somebody elses fault.yesterday msn(oblama media)had a story how gas has gone down BS its actually gone up here the last week
Apr 20, 2012 6:02PM
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Gas prices will drop after the election. Big oil companies will do anything to keep their subsidies.
Apr 20, 2012 4:34PM
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What, exactly, did you think, was going to happen, when the president of the USA and his energy secretary, both said that we need to be paying what Europe does for gas, $8 to 9$ a gal, so that the green programs are more palatable.
Do es any one, really need to tell you, what, to do?

Apr 22, 2012 10:49AM
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OF COURSE WE BLAME THE REPUBLICANS BECAUSE THESE MORONS ARE THE ONES WITH THEIR NOSE UP THE OIL COS A--
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