Lower Oil May Not Mean Lower Gas prices

From the AIA Website:

Guest Commentary: Lower Crude Prices Do Not Translate To Lower Gas Prices
Steven J. Cook, CFAManaging General PartnerStrategic Stock Investments, LLCwww.strategic-stock-investments.com

Last week, the Commerce Department reported the February trade deficit at $65.7 billion versus expectations of $67.5 billion and January's report of $68.0 billion. This better- than-expected performance was the result of:

Lower crude oil prices. Remember back in February when unseasonably warm weather was holding down the demand for heating oil and one of the results was lower crude oil prices? Inasmuch as the U.S. imports large quantities of both crude oil and refined products, it shouldn't be a surprise that lower petroleum product prices would have a positive impact on our balance of payments. However, it is important to note that, with oil prices having been on the increase in the last 3-4 weeks, these rising prices will have a negative impact on our balance of payments in March and April.

Lower quantities of petroleum product imports. Again recall that in the wake of Katrina, the U.S. had to increase the import levels of both crude oil and refined products. By late January, warm weather plus the restart of oil production and refinery capacity lessened the need for these additional imports. So like the decline in prices, the lower quantities of imported petroleum products positively influenced February's trade balance.

That said, the volume of imported products are about to go up again as the U.S. goes into its summer driving season. To explain why requires a little background. As you may know, there is a federally mandated switch in gasoline additives from MTBE to ethanol, scheduled to take place in July. As a result, refiners are starting to sell their stock of MTBE-enhanced gasoline down to zero. But ethanol production has not ramped up sufficiently to allow ethanol treated inventories to match the MTBE inventory draw down.

Unfortunately, it appears that the shortage in ethanol-enhanced gasoline will persist because (1) ethanol production may not reach the level necessary to meet normal summer demand anytime soon and (2) the ethanol producers and refiners have yet to complete the build-out of a delivery system—by which we mean, the infrastructure has not been completed for the storage and transportation of ethanol from the ethanol producer to the refiner; therefore, even if the production of ethanol achieves a level sufficient to supply the quantities needed to meet peak summer gasoline demand, the infrastructure may not be able to deliver it to the refiners on a timely basis.

Therefore it seems likely that the shortfall in gasoline supplies will be met by increased imports—and that will not help our balance of payments.

A decline in the net trade deficit with China. That was a pleasant surprise; and our trade imbalance with China could improve even more. For instance, in a recent meeting, American and Chinese trade officials, among other things, negotiated lower Chinese barriers to the import of American goods. Unfortunately, progress remains slower than it need to be because of {i} protectionist forces in Congress that are constantly threatening China with tariffs and {ii} the Chinese recalcitrance in attacking the piracy of intellectual property.

The punch line is that we believe we will see further progress in lowering the U.S. trade deficit with China but it will not be as rapid as it could be due to politics.

Steven J. Cook, chartered as a Financial Analyst, is Managing General Partner of Strategic Stock Investments.