Never mind those predictions earlier in December that suggested we might stay below $3.00 gal on gasoline for about 30 days. A combination of extremely bullish sentiment, money flow, and new geopolitical worries has prompted a reevaluation of oil prices in the last week.

   Crude oil was lower in the wee morning hours, but prices turned around on ex-Prime Minister Bhutto’s assassination in Pakistan. The tragic death has no direct impact on oil flow, but contributes to the worry quotient for the Middle East.

   Crude closed at $96.62 bbl today, which is $5.56 bbl higher than it was one week ago. Gasoline futures prices gained 4.04cts gal today and closed at $2.493 gal, a record for 2007, and a number that is more than 17cts gal higher than last Thursday’s close.

   Wholesale prices in all of the major bulk markets in the U.S. are about 20cts gal higher than they were on December 20. Adam Smith and other economic giants taught me that wholesale costs have a direct impact on retail prices (with the possible exception of the airline business, which probably can’t be called a business because that word implies occasional profit or customer services).

   These increases are very odd for this time of year. Much like the prep work of contestants on The Biggest Loser, we seem intent on establishing the “biggest bottom” in modern petroleum history. If I recall correctly, Big Bottom was one of the seminal recordings of the rock band Spinal Tap. The American consumer may feel like he has endured a real spinal tap before this is all over.

The Problem With The Big  Bottom

   We always have a Spring gasoline rally - - let’s be clear about that.  In its most timid form, the rally delivered price appreciation of 15% from the Fall/Winter bottom. When Spring petronoia rages like a March wind, it has delivered as much as a 103% gain in the gasoline futures’ price. In April 1989, just as Field of Dreams was hitting the theatres, we saw unleaded gasoline futures top out at 79.2cts gal - - more than twice the 38.95cts gal absolute price that was registered in Fall 1988.  Note: I did not make up these numbers - - this is part of the fossil fuel price record.

   As 2007 ends, there are thoughts that the bottom of Fall/Winter 2007-2008 blazed past our eyes on December 6 when gasoline futures hit an intraday low of $2.1875 gal. Here’s where it gets interesting. Consider:

   - The average Fall-to-Spring price gain in the last 25 years has been 57%. If $2.1875 gal was the “big bottom”, then an average metric implies that gasoline futures would peak at around $3.43 gal in say April, May, or June. That would project to wholesale costs on average of around $3.50 gal and put $4.00 gal gasoline into the average mix.

   - The price rallies have become more and more violent in the last decade. The average Fall-to-Spring increase in the last five years is 78.2%.  If $2.1875 gal is indeed a big bottom, and we merely match the five year average move, we would be looking at a Spring peak for wholesale prices of nearly $3.90 gal. That would project to a nationwide retail average of perhaps $4.50 gal.

The Sentiment & The Smart Money

   Let me say quite clearly that I do not expect 2008 to be an average year. The 2007 year is ending on an extraordinary note, and has included extraordinary price performance, but there is a tipping point where consumer demand gets altered, and the domestic and international economy gets bruised. Instinct and years of observation tell me that this tipping point for retail gasoline is north of $3.25 gal and south of $3.75 gal. Accordingly, I think a range of $3.25-$3.75 gal is a reasonable guess of where gasoline prices may peak in 2008.

   The biggest problem that the market may have as the year dawns lies in the sentiment. Nearly everyone who takes positions in oil believes that 2008 will bring a bullish outcome.

   Technical analysts have long warned that an imbalance in sentiment often signals mature or overbought markets. Strangely, the final few months of 2007 regularly saw sentiment surveys which tallied three bulls for every bear in gasoline. And recent data from the Commodities Futures Trading Commission suggests that the net long position among the big speculators could soon top all time record levels.

    For example, if the big bottom indeed occurred on December 6, when prices eased to $2.1875 gal, it did so despite surveys that showed 71% of oil trading participants to be bullish. Usually, these bottoms occur when bullish sentiment is well under 50%.

   It’s much easier for markets to rally when a large percentage of participants are bearish, and vice versa. When gasoline futures hit their all time high water mark of $2.925 gal after Hurricane Katrina’s landfall, the bullish sentiment soared to 88%. In retrospect, that was the tip-off that all of the buyers had already made their purchases, and there was no one left to buy.

   Many traders still “love gasoline” as a favorite play in 2008. But they admit that they would be more comfortable if some of the bulls shed their horns in the next few weeks and bailed on their positions.

   Among the big speculators - - the huge investment and commodities funds that account for millions of barrels of oil action each day - - the money is squarely being bet on higher prices.  There is a weekly report issued by the Commodities Futures Trading Commission (CFTC) and I am now going to oversimplify what it said last Friday. This report shows the positions of huge investors as well as speculators, and keep in mind that all commodities - - not just oil - - are white hot vehicles among financial participants these days.

   There is an exceptionally high bullish tilt among these high rollers. Last week’s report showed a net long position (betting on price appreciation) of 43.01-million bbl in gasoline blendstock futures. There were 69 entities with long positions (betting on higher prices) and just 14 willing to bet on a lower price outcome (they have had a rough week, to say the least!).   The net long position of 43-million bbl is more substantial now than it was last February and March 2007 when gasoline futures were on the threshold of one of the largest Spring spikes ever.

   At the very least, the data above shows that there is now great comfort for speculators in gasoline’s likely 2008 performance. But I would caution that it’s more difficult for a large thundering herd to proceed on an up ramp than a smaller group, so buyer beware.