Preseason Rally for US Gasoline Futures so far Muted

Article by Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

The wholesale US gasoline market is in the midst of its seasonal transition from winter-grade gasoline to the more costly to produce summer-grade product, and demand is expected to increase as the warmer weather encourages driving. This is the time of year when gasoline futures advance toward their annual high, and futures are climbing, yet based on historical data are demonstrating less oomph then might be expected.

Called reformulated blendstock for oxygenate blending, the gasoline futures contract traded on the New York Mercantile Exchange ended March with seven consecutive sessions with an advance, with the nearest delivered futures contract rallying 9.5cts or 6% during the week-ended March 31. Still, the now expired April contract remained below the $1.7257 gallon 18-month high on the spot continuous chart registered March 1, as concern over subdued gasoline demand capped the upside and pressed the contract to a $1.5623 gallon March low.

The seasonal chart shows NYMEX RBOB futures trading at a premium to 2016’s price performance, while trailing 2015’s values. In 2016, RBOB futures traded at an annual intraday high on May 24 at $1.6664 gallon, and in 2015 at $2.1858 gallon on June 17.

The gasoline futures contract is holding well below the 2011-2014 seasonal price patterns, with oil futures selling off hard during the second half of 2014 as a supply glut swamped the market. Now in its third year, a globally oversupplied market continues to limit price gains, although there are signs that the global oil market is drawing down inventory after three months of production cuts by the Organization of the Petroleum Exporting Countries.

OPEC and 11 non-OPEC oil producing countries agreed to cut their crude production by nearly 1.8 million bpd during the first six months of 2017, and OPEC compliance with their agreement has been strong at over 90%. Yet, US crude production has soared with higher global crude prices, which are again over $50 bbl. Since the start of 2017, US crude production is up 377,000 bpd to a nearly 14-month high of 9.147 million bpd, and is expected to continue to grow, mitigating the OPEC-led production cuts and capping the upside in fuel prices.

Gasoline futures did shift into a bullish backwardated market structure as May RBOB futures rolled into the nearest delivery position with the expiration of the April contract on March 31. A market is in backwardation when supply nearest to delivery trades at a premium to deferred delivery, with the price premium in a nearest to delivery contract occurring despite the storage and hedging costs associated with deferred delivery contracts.

Although in a bullish market structure, too much gasoline supply has weighed on the front end of the forward curve since 2016, limiting price gains in the wholesale and retail markets. In the primary wholesale market, physical supply is traded in bulk transactions as they move from the refinery gate to distribution terminals, with those trades indexed against the nearest or second nearest delivered futures contract.

Gasoline supply was drawn down in the fourth quarter and rebuilding early in the first quarter in agreement with the market’s seasonal tendency. On February 10, US gasoline supply reached a record high of 259.063 million bbl, according to data from the Energy Information Administration, with EIA weekly data dating back to 1990. Gasoline supply has been drawn down consistently since reaching the record high, down nearly 20.0 million bbl or 7.5% through March 24 to 239.7 million bbl, slipping 1.2% below the comparable week in 2016.

Seasonal refinery maintenance should continue the draw down through April, but will the decline in inventory be enough to buoy the flaccid preseason rally?

The answer will fall to demand, which so far in 2017 trailed year ago by a sizeable 380,000 bpd or 4.2% cumulatively through March 24 at 8.745 million bpd, according to data from the EIA. In 2016, implied gasoline demand averaged a record 9.35 million bpd.

Is the US Gasoline Market Defying the Seasonal Downturn?

Article by Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

Gasoline demand in the United States is weakest during the winter months, which Is certainly no surprise considering cold and sometimes hostile weather that limits road travel after the holidays. Yet, despite the seasonal decline in consumption, futures speculators are the most bullish they’ve been in seven months.

During the first two weeks of December, nearest delivered reformulated blendstock for oxygenate blending futures traded on the New York Mercantile Exchange settled above $1.50 gallon and at 110% of the $1.3930 2016 average through December 15 every session, putting the value at a spring premium–a time of year when the gasoline contract typically sets the calendar year high. In 2016, the settlement high was established on May 24 at $1.6544 gallon.

Gasoline supplied to the primary market, which reached a record weekly high in June and is on pace to set an annual record high in 2016, remains strong late in the fourth quarter. The implied domestic consumption rate has slowed against year prior in late November, early December, when nearest delivered RBOB futures traded roughly 25cts gallon less. The lower price point in late 2015 was seen incentivizing demand.

However, while the domestic demand rate has eased from mid-year highs, export demand has grown sharply, offering an outlet for strong production at US refineries. Gasoline export activity expanded in the second and third quarters, data from the Energy Information Administration shows, and surged to a 1.131 million bpd weekly record high in early December.

Much of those exports have been shipped to Mexico, where growing domestic consumption joined refinery constraints and outages to spur the demand for US barrels. Mexico is gradually lifting restrictions on imports, with the government to end price controls in northern Mexico in April 2017, which would aid US refineries that are producing well above their historical average.

The abundance of US crude oil has been a boon for the US refining sector, boosting margins. The gasoline crack spread, which subtracts the cost of crude from the gasoline price, held below the strong margins experienced in 2015 in 2016, as crude prices advanced relative to gasoline and, in large part, to sharply higher gasoline inventory.

Yet, strong gasoline demand and an expected quicker pace of economic growth coupled with an improving US labor market supported a strengthening crack spread in December. Anticipation for a tighter global oil market in 2017 as agreements by the Organization of the Petroleum Exporting Countries and several non-OPEC oil producing countries to reduce production kicks in has also bolstered gasoline values.

World crude values crested above $50 bbl early in the fourth quarter as OPEC oil ministers shuttled between member countries to secure commitments for a production cut after two years of global oversupply that had cratered oil prices and decimated many oil-dependent economies. Amid the long courtship, which began in early August, global oil prices rallied and sold off based on the latest newswire headlines and monthly production data until an agreement was reached on November 30 by OPEC and a companion pact on December 10 by several non-OPEC producing nations.

Effective January 1, OPEC agreed to cut 1.2 million bpd in their crude production through June 2017 and non-OPEC producers agreed to reduce another 558,000 bpd of output that, if adhered to, is seen balancing the market in 2017. This expectation has turned market sentiment bullish, and not only supports crude prices but also gasoline. A look at the forward curve suggests RBOB futures will take out the 2016 high on the spot continuous chart in 2017, with the May contract trading just under $1.80 gallon in mid-December.

While this explains the spring-like premium in December gasoline prices, it doesn’t mean seasonal features have disappeared. The market is in contango through May 2017, a market structure in which nearest delivered futures trade at a discount to deferred delivery, which is consistent with gasoline’s seasonal cycles. Moreover, the discounts in the calendar spreads at the front end of the forward curve are widening, illustrating gasoline’s weakest season during the first quarter.

There are times when the seasonal pattern fails to materialize, which happened in the second quarter 2016 when the front end of the forward curve failed to move into backwardation, a market structure in which futures nearest to delivery trade at a premium to deferred delivery. An oversupplied gasoline market, especially along the East Coast, tamped down the typical summer premium in nearest delivered futures. A modest backwardation compared with historical spreads in contracts nearest to delivery didn’t take hold until late in the driving season when summer contracts moved into a premium against fall delivery. The front end of the curve again widen in September and briefly in early November amid the outages on the Colonial Pipeline’s main gasoline line.

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Summer Hope Dashed as Gasoline Supply Swamps Market

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

Gasoline futures swung to a five-month low of $1.2760 gallon in ending July business before paring the decline on technical-driven short covering ahead of the August contract expiration, with the low plumbed during peak seasonal driving demand in the United States amid a market awash in supply.

The national inventory of gasoline increased during July, and at a time when stocks are typically drawn down amid strong summer demand. The gasoline buildup was unexpected, and has upended a widely held outlook that the global market would reach a balance between supply and demand sometime during the second half of 2016. Continue reading Summer Hope Dashed as Gasoline Supply Swamps Market