Expert Insight: This Is No Time for Bulls

Despite Iraqi unrest, gasoline inventories holding up well

Walter Zimmermann, United ICAP

Iraq (CSP Daily News / Convenience Stores / Gas Stations / Gas Prices)

NEW YORK --Unrest in northern Iraq has lately been capturing more than headlines, and headlines out of Iraq risk impacting the crude-oil and petroleum markets here in the United States.

In a June 23 story, Bloomberg cited record bullish hedge-fund length in WTI crude oil. At the same time, gasoline futures rose to an 11-month high. The big question is whether getting long petroleum here is a wise move or a bull trap. Both current facts and seasonal history suggest that hedge funds have been captured in a bull trap. Let us begin with some facts regarding Iraq.

The militant ISIS (Islamic State of Iraq and Al-Shams) fighters are in the northern Iraq. Iraqi crude-oil production is in the south. And so far, Iraq crude-oil production is unaffected. Iraqi crude-oil exports have been averaging 2.5 million barrels per day. Iraq pumped 3.3 million barrels a day in May. Then there is the obvious fact that Iraq is about 6,900 miles from the United States. So before we jump on the "Iraqi fears" bandwagon, maybe we should take a close look at the situation here in the USA.

Total U.S. gasoline inventories, according to EIA, are right smack dab in the middle of the five-year average range for this time of the year. Refining margins for RBOB to Brent are currently at the same lofty heights seen in June 2013, June 2011, June 2010 and June 2009. And refining margins for spot WTI to second-month RBOB are currently pushing $22 per barrel. So refiners have a tremendous incentive to continue running flat out.

Refining margins also are extremely healthy even though U.S. crude-oil exports are at heights not seen in 15 years, per EIA. And despite these record high crude exports, crude inventories are at the absolute upper edge of the five-year average range. So there is plenty of crude oil, plenty of gasoline and plenty of reasons for refiners to continue running flat out.

Now let us take a quick look at seasonal patterns. What typically happens to gasoline prices this time of the year? Over the last 10 years, spot gasoline futures fell an average of 31% from an average peak date of July 6. Gasoline prices typically fall from midyear to yearend as the usual list of summer fears slowly dissolves into the realty that there is plenty of everything.

My conclusion is that whether one looks at the current situation in Iraq, or the current situation in the U.S., or the 10-year seasonal history, hedge funds have just made a terrible bet. And hedge funds are not the only ones all in on the long side here. The Market Vane bullish consensus for gasoline just hit a new high for the year at 70% bulls. For some perspective, last year's summer peak was 76% bulls, from which point spot RBOB prices fell from a 3.1632 high on July 19, 2013, to a 2.4945 low on Nov. 7, 2013.

Read more from Zimmermann and others in the July cover story of CSP magazine, "Gas Exodus."