Gas Prices to Stay around $2 at Pump

Steve Kanaval  |

Oil No Longer a Flight to Quality

Many don't know that the original flight to quality for traders was the 30-year treasury bond. Further still, many don't correlate the rise in oil prices to the elimination of the 30-year bond.

If you're a portfolio manager, you're esponsible for being on top of volatility, and the most important thing you need to do in times of strife is make sure you have a proper hedge when the world begins to unravel. In short, managing risk is the most important part of the job. Many days are uneventful because markets spend about 85% of the time preparing to move, and 15% of the time moving.

For Portfolio Managers as Well, 9/11 Changed Everything

During the pre-Bin Laden years (before 9/11), gold, and metals in general were the logical place for portfolio managers to flock. Trading volume grew, electronic trading had become a reality for investors, and the number of flights to quality havens naturally expanded.

Oil prices were plunking along with your occasional volatility until September 11, 2001. Then every manager started to use oil futures as the first move in hedging the portfolio, but the die was cast for the US Consumer to pay for the "oil premium" when the US Government eliminated the 30-year treasury.

Osama Bin Laden made Americans pay for many years beyond the bombings, but the government's elimination of the long term bond drove any hedger to find the most effective flight to quality.

The Drive for Results

For money managers, results always dictate the activity - because we are all results driven. Normally, you get split seconds to make a trade and establish a core position before everyone runs through the same door. 

In 2015, the flight to quality for oil is over, and this will be reflected at your gas pumps. The days of $5 gas are over for at least 5-10 years, which the American consumer is entirely unprepared for. American drivers were NOT expecting this, but you should be prepared for gas prices to stay within the $1.50 to $2.50 per gallon range for quite awhile, and you can credit the last ten years where the commodity has spiked as an aberration. That's all it was, really - a temporary commodity spike - not unlike soybeans spiking in the midst of a drought.

So go out and buy one of those large Cadillacs or gas guzzling muscle cars, because $5 gas is not a concern any longer. It will take a bit more time before the consumer grasps this - we're already seeing volatility at the pump - one day it's $1.85, and the next its $2.39. This disconnect has the consumer totally confused by the price action, and most feel like they need to chase lower prices. You don't need to do this - prices have stabilized, and you can look back and see this as the aberration it was during the 10 -15 year flight to quality for oil, which caught the perfect storm.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:



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