Hale Stewart

About the Author Hale Stewart

Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM from the Thomas Jefferson School of Law in domestic and international taxation where he graduated Magna Cum Laude and is also a Chartered Asset Manager, Chartered Wealth Manager and Chartered Trust and Estate Planner from the American Academy of Financial Management. He is the author of the book US Captive Insurance Law. You can read him daily at the Bonddad blog (www.bonddad.blogspot.com).

U.S. Gas Prices Have (Probably) Bottomed

A little over three weeks ago, I wrote that the bottom in gas prices was close. The primary reason was seasonality. As shown in the graph below, in eight of the last 10 years, gas prices have bottomed between mid November and early February:

Since the actual dates aren’t obvious in the above graph, here’s the list:

  • January 2005
  • December 2005
  • February 2007
  • December 2008
  • December 2011
  • December 2012
  • November 2013

Typically, by mid-February, refineries are changing over to their more expensive warm weather blend and driving miles begins to increase. Gas prices – and driving – peak sometime between the end of April and the fourth of July.

In addition to seasonality, I have been looking for a sustained increase in demand. In that regard, as shown in the below graph of Americans’ gas usage, look what has happened to driving (from the E.I.A.):

In the last several weeks, it has been up about 8% or more year over year. I have also been looking for a sustained period of near stability in gas and oil prices, where there has been a close higher than a close two weeks prior.

Here is GasBuddy’s graph of gas prices for the last three months:

It looks like the bottom was $2.02 a gallon on Jan. 28. Gas prices have been between that range and $2.08 for the last two and a half weeks. Their present price of $2.06 is where they were two weeks ago. This is the longest period of stability since early September.

In both 1986 and 2008, when gas prices have nosedived, they have made a bottom within seven months. The 2008 decline is shown in the first graph above. Here’s the 1986 decline:

Last year, gas prices started meaningfully declining in July, seven months ago. Here’s the price of WTI crude for the last three months:

Oil has just been as high as $48.24/barrel, higher than it was as far back as Jan. 12. This is also the longest period of stability since the beginning of autumn.

My thought process in looking at oil prices is similar to that which enabled me to call the bottom of housing sales in spring 2009. The market was plummeting so fast that it had to make a bottom soon – or else housing in 2009, or gas in 2015, would be given away for free in a matter of months! It was literally running out of room to fall. At the very least, the decline would have to decline to a very slow dip.

And finally, this year: Is the market really in as bad shape as it in December 2008, in the midst of the steepest economic downturn in 70 years? There the bottom was $1.61/gallon. So in my piece three weeks ago I concluded:

Since it takes a week or two for prices to filter through to the pump, it looks likely that there will be a further decline to about $2/gallon by late January. The seasonal low is normally set by that time.

It looks like that is exactly what came to pass. In short, the odds are quite good that we saw the bottom of the plunge in oil and gas prices late last week, at $.202/gallon and $44/barrel. If gas prices increase seasonally as they have in eight of the last 10 years, we should see a quick rebound in the next month to about $2.30, and a spring or summer high of about $3/gallon +$.20/-$.10.

So, we can move on from reading about why we are doomed because of cliff-diving commodity prices, to reading about why we are doomed because they are allegedly skyrocketing.

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