The bulls are at it again this summer. However, unlike 2008 when a falling dollar and insatiable demand lifted crude oil prices to all time highs, this year's rally is missing one critical component - consumption.

While the media has been busy playing up summer gas prices and green shoots, energy bulls may want to peek under the covers and realize that we're still in a recession. Demand is off. And while speculators may still be buying and refiners are churning out gasoline like it's 2008, it could all come to an end early this year for energy bulls.

The Energy Department this week reported gasoline inventories increased 3.87 million barrels during the week ended June 19th. That was in stark contrast to a one million barrel draw on supplies that analyst were expecting. This marked a 1.9% rise in gasoline stocks over the prior week, and the biggest gain in stocks since January 16th. US Gasoline stocks now sit at 7% above the 5 year average for this time of year.

More telling, however, was that motor-fuel demand, usually peaking at this time of year, fell 2.4% from last week's numbers. AAA estimates that US travel during the July 4 holiday weekend will decline 1.9% from last year. At the same time, refineries are increasing production into "peak" season as refinery operating rates rose 1.2% last week to the highest levels since December 5 of 2008.

Crude prices tend to take their direction from Gasoline this time of year. This combination of low demand, building gasoline stocks and higher refinery output does not paint a bullish picture for prices. What should be further concern to energy bulls is crude oil inventories still remain near 20 year highs. With this type of supply hanging over the energy markets, bulls looking for an extended energy rally could be sorely disappointed.

Chart courtesy of Hightower Research

We look for prices in both crude oil and gasoline to begin to fade after the July 4th holiday (typically the "high point" of summer demand season) as the trade begins to realize this is not 2008. Slacking demand and rising inventories can only be ignored for so long. The passing of the holiday will have many investors refocusing on supply figures which are suggesting an overpriced market.

We see crude oil prices working back towards the $50 area into September.

We like the idea of taking advantage of the higher strike prices and premiums made available by the recent rally and would look to sell calls in either crude oil and/or Unleaded Gasoline on price strength over the next 10-14 days.

If you would you like more information about selling options in the commodities market or building a portfolio based on the option selling approach, feel free to call or visit us on the web at www.OptionSellers.com.

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James Cordier is the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing in managed option writing portfolios. James' market comments are published by several international financial publications and worldwide news services including The Wall Street Journal, Reuters World News, Bloomberg Television News and CNBC. Michael Gross is an analyst with Liberty Trading Group/OptionSellers.com. Mr. Cordier's and Mr. Gross' book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at bookstores and online retailers now.

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