Gas Prices Jump Higher, but Not Because of Rising Demand

Gasoline prices
Gasoline prices

Has the U.S. economy suddenly improved so much that gasoline demand is pushing pump prices up again? They've jumped by a nickel in past two weeks alone.

At least part of the answer can be found in hedge funds that are placing bets on rising gasoline prices for two reasons. Strikers in France shut down refineries that ship gasoline to U.S. East Coast, and the proportion of corn-based ethanol the government will allow in gasoline is rising from 10% to 15%. With corn prices spiking, that's a recipe for you to pay more at the pump.

According to the Commodity Futures Trading Commission's weekly Commitments of Traders report, hedge fund betting on rising gasoline prices hit "57,640 futures and options contracts for the week ended Oct. 19, the highest level since May 7."

Why would this smart money take such a position? One reason could be the strikes in France, part of widespread protests that began last month against President Nicolas Sarkozy's decision to raise the age for retirement and pensions.

"Limited" Impact?

And according to Bloomberg, the strikes have caused "nine of 11 refineries to shut, while the remaining two run at reduced rates, disrupting shipments to foreign markets." The result of the stoppages is a 300,000 barrel-a-day reduction in gasoline production there. Between Sept. 17 and Oct. 15, supplies from Europe to the East Coast of the U.S. are down 13%, to "53.5 million barrels according to the Energy Department in Washington," reports Bloomberg.

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But one analyst, Michael Lewis of Deutsche Bank, said in an Oct. 22 note that the U.S. has ample gasoline stockpiles, so the impact of the French strike will be "relatively limited." The U.S. Department of Energy reports that motor fuel inventories rose "0.5% to 219.3 million barrels in the week to Oct. 15."

The other reason that gasoline could be rising is a change in regulation that would allow more ethanol in gasoline, as I wrote last week on DailyFinance. With corn prices up 25% in the last two weeks on strong demand and a smaller-than-expected harvest, corn has now spiked 54% in the last year.

Of course, such a rapid rise in gasoline prices might cause people to drive less, which would boost supply even more. And if France can keep those strikers away from its refiners, gasoline prices will likely go back down fast. As far as I'm concerned, that can't happen soon enough.