Thomas H. Kee Jr. is president and CEO of Stock Traders Daily
Oil prices have spiked this year and gasoline prices have followed. This is adding significant pressure on consumers, the driving force behind our economy, and with Saudi Arabia eyeballing $100 per barrel for oil there seems to be no end in sight, but there is.
UCO is up approximately 18% this year, representing about a 9% increase in domestic oil prices. In my region, Southern California, gasoline prices are also approximately 50¢ higher than they were at this time last year. Although the price per gallon is closer to $4.00 in Southern California, where it is closer to $3.00 nationally, the same price difference seems to exist. Gasoline was much cheaper a year ago, and these higher gasoline prices act like a tax on the consumer. Our analysis suggests that the average consumer is losing about 27% of his tax benefit as a result of higher gasoline prices. This dampens the economic impact of the tax cuts accordingly, by hitting the consumer hard.
Clearly, domestic oil companies are benefiting from this, higher oil prices gives them the ability to earn more, but the stocks of the big players are still down for the year. Chevron (CVX) and Exxon (XOM), for example, are down for the year even with the spikes in oil.
Although higher oil prices can benefit the bottom line of these oil companies, the stock prices themselves are not reflecting this, and there could be a logical reason. Investors tend to speak with their pocketbooks, and when it comes to the stocks of these big oil companies investors dominate.
Importantly, there is a material difference between the trading activity in oil itself and the investment activity in the stocks of oil companies. Traders who trade oil directly are fast money traders, they trade futures contracts that deteriorate over time, so they have to be actively trading, but investors in these large oil companies are often much more passive and diligent with their decisions.
That presents an interesting question. Why aren’t the prices of big oil companies increasing along with the surge in oil itself? The answer could be directly tied to the White House.
The United States has approximately 700,000,000 barrels of oil in its strategic reserve, according to reports, and last year President Donald Trump suggested that he wanted to sell half of the nation’s reserves. This may be keeping investors from taking action. This probability is much more macro in nature than the day to day news that often drives the decision of oil traders every day too.
Where oil traders are staring at the ground, investors are looking ahead to potential major changes.
Clearly, no one knows for sure if the White House will follow through and sell chunks of the strategic petroleum reserve, but there may not be a better time to do that than right now. Oil prices have surged, and clearly the best time to sell is when prices are high, but at the same time consumers are being hit as a result of higher gasoline prices. A release of a significant chunk of the strategic petroleum reserves would likely cause both oil and gasoline prices to decline considerably, and be a relief to the pressure higher gasoline prices have put on consumers too.
Although Saudi Arabia and other OPEC members would love to see $100 per barrel again, the likelihood that this happens anytime soon is low. Eventually, OPEC members will also want to start ramping up production again as well, which adds yet another potential Supply source to the future story.
Arguably, traders are not concerned about either of these things now because they are not immediately impacting oil prices, but investors seemed to have a different point of view. Traders should therefore be on their toes. Oil prices could begin to decline at any time, and they could decline aggressively.
A single tweet from Trump could change the oil picture dramatically.
Full disclosure: Thomas H. Kee Jr. is short oil.