I am beginning to feel like a lonely man, clinging to my steadfast belief that things are still very much in control and that 2007 will not bring a repeat of the $3.00 gal average fuel prices brought to bear in 2005 and 2006. I fully expect that between now and Easter Sunday, there will be many more predictions of an assault on new record highs for fuel this Spring. I still disagree.

   But first, let’s take a look at the scorecard. Gasoline has indeed made a dramatic move, rising to $2.591 gal today, according to the OPIS data put together for AAA (For details go to www.fuelgaugereport.com)

   That adds up to about $1.005-billion per day in the nation’s fuel bill, an increase of about $200-million per day from some of the daily payouts registered in late January.

   Last year, we hit $2.59 gal on April 5. We then climbed another 36cts gal in 40 days, hitting a Spring peak of $2.93 gal on May 15.  The early leg of that rally came thanks to refinery maintenance and lingering problems from Hurricanes Katrina and Rita. The second more violent leg arrived by virtue of the change in gasoline specifications in much of the country. MTBE was phased out and ethanol was phased in, and the trading community’s discomfort with the move became manifest in the final 36cts gal of the price spike.

   There is no such specification change this year, but 2007 does appear to be particularly active with refinery woes. But refiners are making anywhere from $20-$40 bbl for every barrel of sweet crude they process here in 2007, and they will get most units back from their Spring pit stops in the next 30 days.

OPIS OILMANAC  - - - A DAILY COST COMPARISON FOR THE DECADE

   Date                                     Retail Price                        Daily Gasoline Bill

Current                                    $2.591 gal                            $1.005-BILLION

3/27/2006                                $2.501                                  $   952-MILLION

3/27/2005                                $2.125                                  $   810-MILLION

3/27/2004                                $1.746                                  $   640-MILLION

3/27/2003                                $1.671                                  $   581-MILLION

3/27/2002                                $1.346                                  $   474-MILLION

3/27/2001                                $1.427                                  $   510-MILLION

A VISIT WITH MASTER PO . . .

    Like David Carradine in the TV series, I have a Kung Fu Master that I turn to when the maniacal behavior of the masses gets quizzical or vexing.  And, as I’ve mentioned before, I believe that crowd behavior, and not fundamentals or headlines, represents the most compelling factor that drives commodity prices lower or higher.

    So, yesterday I turned to my personal Master Po, the noted oil chartist Walter Zimmerman of United Energy, and sought to confirm my sense that the gasoline rally may be getting long in the tooth.

   A history lesson is appropriate.

   Last August 2, the front month contract for gasoline blendstock futures (RBOB) hit $2.42 gal, against the backdrop of BP’s Alaskan pipeline woes, a troublesome July for refinery operations, and multiple weather forecasts that predicted possible hurricane landfalls between Corpus Christi Texas and Pascagoula, Mississippi.

   Less than thirty business days later, the front month futures contract was 86cts gal lower in a severe Summer sell-off that left even veteran traders breathless.

   Could a similar market dive be lurking this April or May?

    Zimmerman believes that the risk/reward ratio for professional traders indeed suggests that downside risk may dwarf upside potential in the next 30 days.

    Zimmerman has a splendid track record so far in 2007. He raised eyebrows more than a month ago when he targeted $2.09 gal as a logical target for this year’s preseason rally in RBOB futures. He revised that target higher in recent weeks to just over $2.16 gal (for prompt month RBOB). That number is now well within the daily reach of the market, given yesterday’s April RBOB close of $2.0677 gal, reflecting a Monday gain of 6.94cts gal. Remember, gasoline futures dipped to $1.335 gal just two short months ago, so we have already seen a dramatic increase of well over 70cts gal.

   Zimmerman even gives a loose target date, based on seasonal cycle analysis and wave counts, and mentions a $2.1625 gal ballpark top by April 10. That would be more than a month ahead of the “average” preseason apogee of May 15 in “bullish” years, but several weeks beyond the “average” preseason March 17 apogee of “bearish” years.

   Some observations that should raise red flags with those carrying heavy exposure to a market downturn include:

     - Sentiment is creeping toward ratios that have preceded dramatic sell-offs in the past. A number published by Market Vane tracks how many trade participants are bearish or bullish, and the bullish bias may well surpass 60 percent this week. That might not seem to be a terribly imbalanced bias, but prior to Hurricane Katrina, a 60 percent number was nearly always a tip-off for an overbought market.

    News stories are being grabbed, touted and tweaked by traders to justify some new legs higher, even though the “news” may not be particularly relevant to the gasoline rally. “The news is only going to be ‘always bullish’ near the top of the market,” notes Zimmerman. He suggests that the ongoing spin that ties crude’s strength to Iran’s seizure of 15 United Kingdom sailors is a particularly “egregious example” of financial journalists erroneously concluding that Iran is wielding the oil weapon.

   Fears about global or U.S. financial woes have been summarily dismissed, and Wall Street has sizzled more than it has simmered in recent weeks. Oil, and refined products, will not be able to move higher if the housing crisis and Wall Street excesses reemerge as factors this Spring, Zimmerman stresses.

   Ultimately, the turnabout may come, and the peak could be witnessed in the rearview mirror when “bullish news” surfaces, and gasoline fails to rally to that “news”. This kind of trading behavior has been a precursor to other preseason and demand rallies giving way to more temperate prices in the past.

   And, the top may come with the kind of grand finale that accompanies fireworks’ displays. It’s easy to imagine a 10cts gal or greater spike in the space of hours, or even minutes if another refinery event occurs in the next two weeks.

   What happens if there is the collective market epiphany that recognizes the preseason gasoline rally is past tense?

   Zimmerman notes that there is a tendency for the market to deliver stunning punishment. The “leg down” could be a “dramatic flush”, he observes. It’s not unusual, for example, to see a relatively quick 25 percent cut in the spot month’s value. If RBOB tops out at say, $2.16 gal, it would not be extraordinary to see prices begin a plunge of 50cts gal or more.

MEANWHILE, ON THE DIESEL SIDE . …

   Many of the refinery problems that have occurred in recent weeks have cut into the ability of U.S. processors to make the new low sulfur fuel required for sale at most American truck stops and diesel pumps. In the last week alone, some areas of the country have seen wholesale diesel prices move up by more than 25cts gal.

   As I’ve mentioned before, the wholesale market determines retail prices with relative efficiency, so we’ll see considerably higher diesel numbers on the street in the next ten days. The nationwide average hit $2.744 gal this morning, up about 9cts gal from the same day in 2006.   It will almost certainly move into the $2.80’s in the next ten days, putting some pressure on the commercial economy.