Interest Rate and Gas Prices

The day inches closer as economists continue to mull over the possibility of the Federal Reserve raising interest rates. Bond traders provide small signals of the sentiment surrounding the decision as they drop the price of the 2-year Treasury security in anticipation of an abstention from increasing interest rates. But an increase is expected in the future with long-term Treasury bonds going up in prices. Commercial economic data came out today, but no data was convincing enough to ensure the future of interest rates. In the same manner, the markets gained today under the same projections of a continuation of low interest rates. This is expected to keep encouraging investment spending and push inflation from its low levels this year. The Dow Jones is up 1.08% with WTI price increasing $0.86 (+1.93%), showing positive movement on both investor sentiment and production cuts. Indices measuring the energy sector show some increases. The NYSE Arca Oil Index (XOI) gained just 0.80% and the S&P Energy Index increased 0.87%. Just as energy stocks were dragging the markets down yesterday, today Chevron and other oil based companies lead gains today. Chevron, listed in the Dow, is one of the highest movers as it continues to represent the consistent fluctuations in energy investing. The volatility, though, is allowing for small profit taking on crude oil ETFs which move with the futures price. UWTI and DWTI have been especially active as they track the movements and react with 3x accelerated returns. A build up of long positions wants to overcome the potential sell-offs that threaten losses, but overall the market seems shaky. The volatility tracker, VIX, drops -5.44% to signal some kind of stabilization of the global markets, but economically, things just don't feel right. Emerging markets continue to feel pressure on their financial systems, especially their currencies which are fighting with a continually strengthening dollar. A large majority of the economic concern lies with emerging market countries like China and Brazil where weakness can stunt an environment used to aggressive growth. China especially discourages potential for rate raises as analysts from the Chinese government predict lower than average growth from the second largest economy in the world. Other weak foreign data could translate into lower demand in the commodities market, endangering the prospects of inflation and increases in corporate profits. Another energy commodity that will have a huge effect on macroeconomic indicators such as inflation is gasoline contract prices. As prices go down, more disposable income is opened up to consumers, but it can put pressure on companies with large stakes in downstream operations.

The first thing to note when looking at a chart for the unleaded gasoline spot price is that the parabolic shape almost mirrors that of crude oil. Refineries actually purchase crude oil contracts from that commodity market which directly links their price. There are some factors that also play into the bigpicture like refinery costs and driving demand, so deviations between the two prices can subtly tell a different story. So far this year though, gasoline prices have been dictated by crude oil movement. The first thing to notice is the parabolic shape that shows the rebound and the drop that followed as a result of the crude oil glut. January marks the lowest point of the year so far, but prices in September could retest that 9 month low. For about two and a half months, gas prices have continued to move under the 30 day average. In fact, the movement rarely deviates from the 7 day average. Even though, the trends in Jan-Feb and July-Aug seem to be significant, they don't appear to be supported by a lot of volume. Firms don't seem to be satisfied with the price, but most are bearish because of the slightly higher volume levels during selling periods. This can also be seen as price levels topped $2, and the bull trend tested the bottom three times before dropping off a cliff. Interestingly enough, prices at the pump stay at levels near the rebound period, and often times consumers question why prices are the way they are. It should not be forgotten that gasoline is typically a product with inelastic demand. This means that consumer demand will rarely change no matter what the price is. For this reason, prices at the pump will not always reflect futures contract prices. As for predictions, gas prices should remain low as volatility mounts behind crude oil price drama. As production is cut and refineries are less full, hedging will create buying pressure in the coming months. Investors should be keen to watch crude oil, natural, and gasoline prices in the future to accurately assess energy sector health for Q3 and Q4.