Gas Continues to Correct Back Towards Demand Fundamentals
It’s been a wild ride in gasoline over the past month as refiners have been bidding up the price of RINs due to U.S. E.P.A. bioethanol blending rules. This caused rampant speculation in the futures pits sending gasoline futures prices soaring while the price of Brent crude fell on Euro-zone breakup fears spilling over into the world economy.
But that effect is short-lived as the reality of $3.35 per gallon gasoline futures and $108-$110 Brent crude simply makes no sense. In the near term, I’m looking for Brent to re-test $105 per barrel next week. If that holds and prices reverse the effects of widening inflation expectations in the U.S. TIPS market will re-assert themselves and create the new trading range. The odds of this are good as the Gold to Brent ratio has regained 15 barrels to the ounce, the long term average, and the price of gold is moving higher. Gold is now helping to support Brent prices and once that happens we’ll see the end of he equity rally in the U.S.
The money the Fed is printing will shift from supporting equities to shoring up bank liquidity as events in Europe unfold and depositors continue to drain money from western banks and move it into different vehicles, like gold. I also expect to see money flow into emerging market sovereign debt of the relatively stable nature. Singapore, Malaysia and Thailand come to mind along with obviously Hong Kong.