In 2022, extremely elevated gas prices have been impacting the economy, as every product-producing company has seen energy and transportation costs increase, forcing price hikes on the part of businesses simply to keep margins flat. Although there are a variety of factors affecting CPI readings, high gas prices certainly apply upward pressure. Today, gas prices are still extremely elevated compared to historical levels. At the AAA current national average of $4.22, just 1.8% of all days since the start of 2005 have seen a higher national average high, and all of them occurred this year. Click here to learn more about Bespoke’s premium stock market research service.
The national average price per barrel is still up 32.75% y/y, but this is actually the smallest y/y increase so far in 2022 and comes as the national average price has declined for 48 consecutive days. That’s the fourth longest streak on record. This streak is certainly notable, but gas prices are still at a level that is wearing on consumers.
The 40-day rate of change in average gas prices (-15%) has been notable as well, with only six other periods seeing a larger decline on a percentage basis. The most recent occurred during the COVID crash when it became clear that demand was going to deteriorate due to government-imposed mandates across the globe. Consumers will hope for further declines as we begin to near the $4.00 per gallon level. Not only have prices been falling lately, but they have also been more volatile than usual, as the current 50-day standard deviation (26 cents) is 3.2 times higher than the average since 2005. Click here to learn more about Bespoke’s premium stock market research service.
The price of a gallon of gas, while still up YTD and relative to most other periods in the past, has pulled back considerably and consistently over the last six weeks. While a gallon of gas topped $5 in early to mid-June, over the weekend, the average price was back down to $4.36. The decline in prices has also been consistent as prices have now declined for 41 straight days. Going back to 2005, when AAA began tracking the daily national average price, this current streak now ranks as the fourth-longest on record after surpassing the 39-day streak from September 2006 over the weekend. In order for this current streak to move into the top three and oust the 62-day streak from the COVID crash, we’ll need to see another three weeks of daily declines, and in order to move into first place overall, we’d need to see the current streak nearly triple in length to 118 days and stretch out to early October!
While the current streak of declines is the fourth-longest on record, the magnitude of gasoline’s decline over the last 40 days hasn’t been quite as extreme. At -13%, there have been seven other periods where average prices at the pump experienced a larger decline over the same time period. What is notable, however, is that back in March the 40-day rate of change was the second highest on record trailing only the 33% increase that came in the wake of Hurricane Katrina in September 2005.
In order for prices at the pump to keep declining, we’re going to need oil prices either to stay around current levels or continue declining. Oil prices have obviously been weak for the last month or so, but over the last two weeks have shown some stabilization above the 200-DMA, including two different days when the price dropped below the 200-DMA intraday but bounced. If the 200-DMA holds in the near-term, gas prices are likely to stop declining, so this will be a key level to watch for what will ultimately determine the health of the consumer. Click here to learn more about Bespoke’s premium stock market research service.
Up until June 8th, the Energy sector was the only thing working in the market. However, the sector has reversed dramatically, falling close to 25% since. This comes as the price of oil pulls back and the White House targets the entire vertical with accusations of profiteering. As any investor knows, the price of oil is not set by individual energy companies, but rather by the forces of the market. Interestingly, the same administration that is pressuring oil companies to increase supply campaigned on the fact that they would not allow for drilling permits to be renewed on federal land, so the current rhetoric is… interesting to say the least. To quote Biden himself: “Number one, no more subsidies for the fossil fuel industry. No more drilling on federal lands. No more drilling, including offshore. No ability for the oil industry to continue to drill, period.” Rhetoric like this can logically cause a reduction in domestic energy investments, as CFO’s adjust capital expenditures based on added legislative risk.
Nonetheless, the price of oil has pulled back significantly, which causes a compression in gross margins for suppliers. Oil is currently trading at about $100 per barrel. Although oil is still up over 33% YoY, it has pulled back by 23.3% relative to highs. Most industries will breath a sigh of relief, but energy companies will be in the other camp. Notably, crude recently broke its uptrend, and seven of the last 15 trading days have seen declines of 3% or more.
Below is a chart showing the rolling % of 3%+ daily declines over all 15-day periods. As you can see, this is an extremely elevated reading, surpassed by just The Great Recession and the COVID Crash. Following the high reading in 2008, XLE rebounded 8.9% in the next week and 7.8% over the next month. In March of 2020, XLE fell by an additional 13.1% over the next week, but rebounded 14.7% over the following month after the peak reading.
Below are snapshots of S&P 500 Energy stocks as they currently stand versus where they stood on June 8th when XLE peaked. All but one of the stocks have entered an oversold range after every single one was overbought as of 6/8. What a difference a month can make! On average, these stocks were up 66% YTD (median: 64.8%) on June 8th, but are now up an average of just 22.3% on a YTD basis (median: 18.0%). Between the close on 6/8 and 7/5, the average stock on this list fell by 26.1% (median: -26.7%), delivering pain to investors who bought the rip. Click here to learn more about Bespoke’s premium stock market research service.
So far in 2022, sky-high commodity prices have plagued equity markets. As input prices have surged for corporations, consumers have faced record-high gas prices, and families are forced to spend A LOT more on food. This has led to a compression in discretionary budgets among consumers, record-low consumer confidence readings, and multi-decade lows in investor sentiment. Yesterday, commodity prices fell sharply as speculators feared demand destruction due to rising recessionary risks. Although the reasoning for the selloff is certainly not positive for the broader economy, investors breathed a sigh of relief as one of the major economic/market headwinds eased. Click here to learn more about Bespoke’s premium stock market research service.
Yesterday’s move was the third-largest downside move in the Invesco DB Commodity Index ETF (DBC) since its inception in 2006, falling short of just two occurrences in March 2020 and March 2022. Following yesterday’s decline, DBC is now down over 18% from its June 9th high and up ‘just’ 20.2% YTD. Over the last 12 months, though, DBC is still up 73.6%.
Following the other nine worst days in DBC’s history, the median forward performance has been relatively weak, which by itself, is a positive for corporations and all other commodity consumers. In the next week, DBC has only performed positively one-third of the time, booking a median loss of 2.7 percentage points. Over the following three months, DBC has appreciated 56% of the time and has tended to remain flat on a median basis. In three of the nine prior occurrences, DBC rallied 18% or more over the next three months, while it declined 29% or more twice. Click here to learn more about Bespoke’s premium stock market research service.
As we noted in today’s Chart of the Day, inflation data has been moderating and so too have gas prices as demand has pulled back and refinery output rises as we discussed in last night’s Closer. Roughly two weeks ago, AAA’s national average price for a gallon of regular gasoline peaked just above $5. Granted it is still elevated, but that price has fallen to $4.86 today. Taking one step further up the supply chain, Gasoline futures peaked even further ago on June 9th and have fallen 14.5% since then. As shown in the second chart below, that decline is now putting the past several month’s uptrend on the ropes.
While both the national average and gasoline futures have been rolling over, the decline in the latter has been far larger as those prices tend to slightly lead retail prices. As for the size of that disconnect, taking the spread of the one-month percent change of the two measures of gasoline is historically wide at 14.4 percentage points. The last times such a divergence has been observed were earlier this spring, last fall, and back in 2020. In those periods, such divergences were short-lived. As shown in the bottom chart where we overall the AAA national average and Front Month Gasoline futures, moves in the futures market tend to lead prices at the pump, in other words, it is unlikely retail prices will continue to fly in the face of lower futures prices. Click here to learn more about Bespoke’s premium stock market research service.