Originally published in the February 14th 2009 edition of the Financial Post section of the National Post.

Unleaded gasoline prices on both sides of the border have recovered during the past six weeks. Will they continue to move higher?

Seasonality

U.S. unleaded gasoline prices have a period of seasonal strength from the end of January to the end of April. The trade has been profitable in nine of the past 10 periods. Average gain per period was 21.2%. This is the period when refiners convert their facilities from heating oil used during the winter heating season to gasoline used during the summer driving season. In addition, refiners use this period to complete their annual maintenance programs. Demand for gasoline increases and inventories tend to move lower. Gasoline prices rise accordingly.

Following is the data for the past ten years:

Technicals

Gasoline has an improving technical profile. It recently broke above a reverse head and shoulders pattern on a break above $1.25 U.S. per gallon. Intermediate trend is up. Short term momentum indicators are trending higher. Next intermediate technical target is $1.68 U.S. per gallon. Canadian gasoline prices have a high correlation with U.S. wholesale prices. If the target is achieved, the price of gasoline in the Greater Toronto Area will move from $0.84 per litre to $1.13 per litre by May.

Fundamentals

Chances of a seasonal trade this year are above average. Demand for gasoline is increasing despite the slow down in the U.S. economy. Greater demand has been prompted by a drop in wholesale prices from their all time high at $3.64 U.S. per gallon set last July. Gasoline inventories currently are moderately high. However, supply from February to May this year likely will fall below average levels. Refiners are expected to spend more time this year repairing facilities. At least one refinery is scheduled to close permanently. Most U.S. refineries are old and need an increasing amount of repair. Some refiners along the Gulf Coast suffered damage during hurricane season last fall and will need additional adjustments. Also, crack spreads (i.e. the spread between crude oil and refined product prices) were below average late last year and have only improved slightly during the past six weeks. A significant incentive to complete the conversion and maintenance process on a timely basis is lacking this year.

What to do?

Now is a good time to drive to the southern U.S. for your winter holiday. Enjoy low gasoline prices while they last! By May, gasoline prices will be significantly higher.

Investors can participate in the seasonal trade by owning the United States Gasoline Fund, a futures-based ETF that tracks the price of gasoline (Symbol: UGA). An indirect way to invest is to own a basket of U.S. refining stocks.

Don Vialoux, Chartered Market Technician is the author of a free daily report on equity markets, sectors, commodities, equities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux currently does not own unleaded gasoline related investments

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