Ignore This Gas Gauge at Your Own Peril

My wife and I had our gaggle of children out past their bedtime on Wednesday. Then we ran out of gas in a parking lot, leaving our Chevy Suburban motionless atop a drainage grate.

I mention the grate because it meant the slope of the asphalt was uphill either way I tried to push the half-ton vehicle out of the way.

Despite my superhero (according to my kids) strength, I needed the help of a Good Samaritan to give me that last bit of oomph and drive me to a gas station.

A man named Gilford obliged, thanks goodness. I come to find out he’s of Haitian descent, also has a gaggle of children and wonders if we’re not on a crash course toward World War III.

Besides appreciating our impromptu introduction, there is a silver lining to this whole experience: A gallon of gas is only $1.99 ’round these here parts!

But not for long.

So I have some insights I’d like to share. Let me start by saying simply this …

Ignore This Gas Gauge at Your Own Peril

We had quite the response to last Monday’s note about oil. Thank you!

So I’m sticking with the energy theme today when I tell you to:

Do the OPPOSITE of what I said last week!

Though much of the discussion about crude oil’s bearish fundamentals remains relevant, it might not be immediately applicable.

For example, I said:

First of all, the latest thrust of crude oil’s decline seems very fundamental. That is, supply and demand stats are adding pressure to the price.

Demand is sluggish-er than expected.

And U.S. crude oil inventories are rising when seasonality typically points to a decline. The reason is largely due to increased imports.

OPEC nations continue producing  …

And that helps make it cheaper for U.S. refiners to import crude than transport it by rail across the country.

Further to that point, the week proceeded to add to the pile of bearish fundamentals.

New statistics revealed stocks of crude rose and supply remained steady.

Imports were up again.

Thank you for the oil, Saudi Arabia. And you’re welcome …

Source: EIA; The Daily Shot

With oil at $40 now, that trend is likely to continue.

Last week, with those bearish fundamentals in mind, I boiled it down to this:

It looks like crude’s decline can continue.

And:

I think it makes sense to wait before buying into a potential rally in crude oil and energy names.

Strike that. Reverse it.

Here’s why …

This technical picture suggests crude is at a level of support that could see prices bounce an easy 14% …

And perhaps a whole lot more if fundamentals happen to improve simultaneously with upside momentum.

Such improvements in fundamentals might get sparked by gasoline.

Along with new crude stats, last week brought new gasoline stats. Namely, a bigger-than-expected decline in inventory levels.

Considering how high these gasoline stocks have been running relative to their five-year range, this universe is ripe for a rethink.

Hedge fund managers have built up an extreme net short position in gas futures.

You know I love finding these position extremes.

They aren’t precise timing indicators, but they’re worth our attention. When these extremes develop among certain classes of speculators, they often act as a good contrarian indicator in the intermediate term.

In other words: The extreme net short position suggests the price of gasoline will rebound.

And that’s what I want you to leave with — the idea that now might be a good time to have gas exposure. In fact, subscribers to my premium services have already been given specific instructions about how to play it and what to expect.

Here’s a tease: Think about using the United States Gas Fund (UGA) to get easy exposure to the price of gasoline futures.

And here’s a chart, for what it’s worth:

And if my analysis and indicators are right, an investment here can really prime the pump for future profits.

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also …