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Gasoline prices should continue to weaken through Monday

At this time, the spot market for gas prices are "backwardated" 
or in lay terms, "bassackwards."  Backwardation occurs when 
the current price of spot fuel (currently at $2.73 a gallon) 
costs less than the expected futures price. 
 
Why traders are expecting a higher futures price in November and
December doesn't make much sense. Domestic WTI Oil almost belly-flopped 
below $100 a barrel this week, just $2 shy of the $99 a barrel mark.
WTI is trading today at $103 a barrel, or about 2.46 per gallon of 
gasoline.  Meanwhile the average pre-tax wholesale price for gasoline
sold in Los Angeles is about $2.77 a gallon. The last Energy Information
Administration statistical bulletin surprised many with a report showing
that crude oil builds now total 6.8 million barrels.
 
Strong domestic production of crude oil along with imports of more 
than 8 million barrels-per-day helped create the surplus. What's more,
U.S. crude oil production (think fracking) surpssed 7.8 MILLION barrels 
a day. That is the second time in 24 years that U.S.A. crude production
has topped the 7.8 million barrel mark.
 
Despite an abundance of oil, the price remains high ... and that means 
the refineries are only grossing about 31¢ per gallon of gasoline sold 
to a retailer. Historically, that is a razor-thin margin. What's more, 
they're selling less gas because of demand destruction and a bad economy. 
 
Refineries prefer to make at least 40¢ a gallon on their gasoline, 
and one way to do it is to fiddle with the spot market at a time when 
prices should be reaching the lowest level of the year.
 
What all that means is that the coming weeks will be a good time to expect 
to hear reports about unplanned "refinery outages," unplanned "flaring 
incidents" etc., that will scare the market into a higher price modality.
 
THE WHOLESALE PRICE PICTURE:
 
This morning, Bob van der Valk, the Oil oracle of Terry Montana, reported
price hikes of up to 8¢ a gallon with some vendors in LA. We'll see if they
stick. However, at this time, the average wholesale price for an unbranded
independent is a penny cheaper than the average major brand stations.
This puts us perilously close to a rack inversion. Rack inversions are ALWAYS
accompanied by price hikes.
 
Does this mean a price hike is underway? 
 
Not yet. But I expect to see a firming of wholesale prices, and reduced
margins for retailers. 
 
BOTTOM LINE: Retailer margins are still healthy enough to encourage 
discounting, so prices should go down through Monday.