While most of the trading universe was preoccupied with other things the price of crude oil has been ripping higher in an almost straight line. KKM Financial CEO and founder Jeff Kilburg says Americans aren't going to be able to ignore the spike for long.
In early trading Friday WTI crude oil tacked on another dollar, topping $109 a barrel, and racing to break $110 for the first time in multiple years. A close here would mark the second straight week of multiple percentage point gains.
"We're seeing oil prices unfortunately rise and that's going to mean pain at the pump," Kilburg told Breakout from the floor of the CME. "On July 1st crude was trading $96, now we interject some Egyptian turmoil and people are really scared."
Traders are frightened not just because many of them missed the move but they've been shorting crude during the rally. As WTI rallies those same traders are taking off the short position by purchasing upside calls or get long in other ways, all of which adds fuel to the rally.
The fundamentals are in the bears' corner as Kilburg sees it. Demand is weakening, global headwinds are picking up, and the dollar is relatively stable regardless of Bernanke's apparent best efforts to weaken it. He believes the price could move as high as $110, but any stability in Egypt could send it right back to the $90s in a hurry.
Even a drop in crude oil prices might not be enough to save motorists from price increases at the pump. Gas prices are suddenly on the rise but in this case it's not entirely the fault of "evil speculators" or Big Oil. The problem instead stems from Washington DC's devotion to the failed alternative fuel that is Ethanol.
Research suggests the net impact of growing corn as a raw ingredient for a gasoline blend is wildly inefficient, but politicians are considering raising the mix anyway. As the blend of ethanol to gas moves from 10% to 15% over the next few years, prices for refiners will increase. Refiners will pass the expense on to consumers. They're businesses that are accountable to shareholders, while the politicians answer to lobbyists.
DC and refiners are fighting over who is most to blame for the rising cost of converting crude into gas but the fact remains the refining process is becoming more expensive and consumers are going to pay for some of it.
For traders short crude a price break can't come soon enough. For drivers filling their tanks there is a the distinct possibility that gas prices will go up because of crude oil, but won't come back down because of DC.
"The additional cost to produce ethanol which will be blended with gasoline will come back to consumers," warns Kilburg. "It will hit us."
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