US Gasoline Futures Drop Back in Spring Transition

Sliding from a 1-1/2 year high on the first day of March, the April gasoline futures contract rolled into the nearest delivery position in trading on the New York Mercantile Exchange, signaling the spring transition to more stringent fuel specifications.

Known as the Reformulated Blendstock for Oxygenate Blending contract, April RBOB futures rallied to $1.7257 gallon on March 1, the highest trade on the spot continuous chart since mid-August 2015, after settling 21.74cts above the now expired March contract on the last day of February. However, too much gasoline supply and weaker-than-expected gasoline demand in early 2017 pressed the April contract down more than a nickel to settle at $1.6780 gallon on March 1.

Will pricing in the wholesale gasoline market mimic the old Pennsylvanian maxim about March — “In Like a Lion, Out Like a Lamb?”

Gasoline supplied to market in 2017 through February 24 averaged 8.451 million bpd, down a steep 534,000 bpd or 6% compared with a similar timeline in 2016, while also below an 8.5 million bpd five-year average, according to data from the Energy Information Administration.

However, the statistic might be overstating the bearishness in consumption when you consider gasoline demand in 2016 reached a record high of 9.35 million bpd, while the current 2017 cumulative average is greater than in 2013 when it was 8.3 million bpd, above 2012’s 8.39 million bpd average, and tops the 2011 average of 8.19 million bpd.

Indeed, gasoline demand surged during the first three quarters in 2016 before tapering off in the fourth quarter as retail prices gained sharply. The U.S. retail gasoline average is currently more than 50cts higher than a year ago, reaching $2.314 gallon on February 27 for regular grade according to an EIA survey. Poor weather in California has also been credited in hamstringing gasoline demand in early 2017.

“This YOY declining trend actually began at the end of 2016 and has led to record levels of gasoline in storage and the lowest gasoline margins we have seen in some time. It is also causing refiners to review their operating strategies after running “full out” over the last couple of years to satisfy strong domestic and export demand,” writes Turner, Mason and Company in their most recent John Auers’ Turning Point blog.

Commercial gasoline inventory in the United States reached a record high of 259.1 million bbl on February 10, while drawn down roughly 3.2 million bbl over the following two weeks to 255.9 million bbl as of February 24, EIA data shows. Gasoline supply along the PADD 1 East Coast also reached a record high on February 10 of 76.3 million bbl, while down 1.3 million bbl to 75 million bbl on February 24. The high inventory level prompted some tankers ready to offload gasoline in the New York Harbor to be rerouted in February.

Analysts note March and April are peak months for unit shutdowns during the spring refinery maintenance season, with those outages set to help pare down the oversupply. Moreover, January and February are historically the weakest months for gasoline consumption, and as the weather warms driving demand will climb.

Wholesale prices look vulnerable to the downside in March nonetheless, as talk abounds in the market that some refiners will slash their offers to move out winter grade gasoline to make room for lower Reid vapor pressure product. RBOB futures forward curve through August delivery illustrates the likely cap on wholesale gasoline prices, with the modest contango–a market structure in which nearest delivery is priced at a discount to deferred delivery–at less than 7cts a gallon. August RBOB futures settled at $1.7468 gallon on March 1.

Another sign suggesting price weakness, noncommercial traders, also known as speculators since they are not buying a futures contract to hedge an underlying physical position in the market, have consistently reduced their exposure to higher prices since reaching a 10-month net-long high on January 18. Speculators have liquidated 30,134 or 34% of their long RBOB futures positions since reaching the high to 58,535 contracts as of February 21, the Commodity Futures Trading Commission shows in their weekly Commitment of Traders report, with a long position taken on expectations prices would move higher.

Until the oversupply clears, gasoline prices will be capped. However a robust U.S. economy and ongoing gains in employment could help accelerate the drawdown.

 

The stock market continued its tear, with the Dow Jones Industrial Average rallying through the 21,000 mark for the first time on March 1, and U.S. manufacturing expanded in February, with the Purchasing Manager’s Index climbing a more-than-expected 1.7 points to 57.7 according to the Institute for Supply Management, with readings above 50 indicating expansion.

At 4.8% in January, the national unemployment rate is at 10-year low, and the labor participation rate has ticked up 0.3% since Trump won the presidential election to 62.9% in January, although remains near its lowest point in 40 years.

The string of positive economic data has enlivened consumer sentiment, with the Conference Board, a private international company, reporting consumer confidence in the United States at a 15-year high in February. These data sets indicate consumers are bullish.

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

Gasoline’s Bull Charge into 2017

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

The average price for regular grade gasoline sold at retail outlets across the United States reached a six-month high of $2.496 gallon on January 9, a time of year when gasoline prices typically decline, with the previous high of $2.499 gallon registered in June also the 2016 high, data from the Energy Information Administration shows. The average declined over the following three weeks to $2.408 gallon on January 30, although appears positioned to again advance in February.

The price action runs contrary to gasoline’s seasonal disposition, with seasonal factors corroborated by bearish fundamentals. EIA data shows the domestic supply of gasoline as of January 27 increased 21.6 million bbl or 9% from end year 2016 to 257.1 million bbl–the second largest inventory holding since record keeping began in 1980, with the high reached in mid-February 2016 at 258.7 million bbl.

The building supply came as implied demand–gasoline supplied to the primary market–slumped to a nearly two-year low at 8.039 million bpd despite strong exports. EIA shows US gasoline exports averaged 925,250 bpd in January after reaching a weekly high export rate of 1.149 million bpd during the week-ended December 23.

Gasoline Supply

 

Bearish weekly statistics in January provided some downward pressure, with February gasoline futures traded on the New York Mercantile Exchange testing price support at the $1.4888 gallon 50% retracement point for the November-to-January rally late in the month after reaching a 16-month high on the spot continuous chart at $1.7095 gallon on the first business day of 2017. Still, the February reformulated blendstock for oxygenate blending futures contract on NYMEX expired January 31 at $1.5256 gallon, a value at the upper end of the 2016 summer range for nearest delivered futures and nearly $0.40 gallon higher than year prior.

On the first day of February, March RBOB futures settled at $1.5791 gallon as it rolled into the nearest delivered position in the contango market, well above the $0.8975 gallon multiyear low plumbed in February 2016 by nearest delivered futures. The forward curve ended February 1 at a $1.8139 gallon high for May delivery, near flat with the June contract at $1.8105 gallon, and at a slight premium to April delivery at $1.7973 gallon.

RBOB Gasoline

 

RBOB futures second quarter premium to March delivery coincides with the preseason rally for gasoline, as prices advance from late winter to spring amid the transition to the more costly to produce summer-grade gasoline specifications, seasonal refinery maintenance, and the expectation for greater demand during the warm summer months. EIA forecasts US gasoline consumption to average 9.62 million bpd from June to August, a tad higher than estimated for the corresponding period in 2016, and well above a projected 9.04 million bpd demand rate for the first quarter.

Gas Consumption

Driving current price strength is bullish sentiment reflected by building length in NYMEX RBOB futures by non-commercial market participants who are speculators since they are not using the futures contract to hedge a physical position in the underlying market. The non-commercial trading group boosted a net-long stance in RBOB futures to a 10-month high in mid-January before paring the position data from the Commodity Futures Trading Commission shows, with a long position taken on an expectation for prices to increase.

Open interest for RBOB futures reached a record high in January, with the elevated market participation demonstrated by the outstanding contracts indicating wide support for higher prices. This dovetails with bullish sentiment for West Texas Intermediate futures, with the US crude price benchmark achieving a record high net-long position of 482,523 contracts held by speculators in late January, with the futures position equivalent to 482.523 million bbl of crude oil. Open interest for WTI edged off a record high to 2.15 million outstanding contracts in late January.

RBOB WTI Futures

Production cuts by the Organization of the Petroleum Exporting Countries and 11 non-OPEC producers that took effect January 1 continue to promote the market’s exuberance, with early indications showing strong compliance with the cuts by OPEC. Of the nearly 1.8 million bpd in combined production cuts agreed to by the parties in late 2016, OPEC has agreed to a 1.2 million bpd reduction during the first six months of 2017.

OPEC has so far defied its history of cheating on quotas spurring the record length in WTI futures. The International Energy Agency expects the production cuts to erase a global supply-demand imbalance in the second quarter, three years following the start of overproduction which peaked in the second quarter 2016.

The large net-long stance leaves the market vulnerable to a steep selloff, and the market will continue to closely scrutinize OPEC production rates to ensure a high level of compliance. So too will market followers look over US production data, which reached a 10-month high in January at 8.961 million bpd as higher crude prices prompt US shale oil producers to finish drilled but uncompleted wells. The EIA reports 5,379 DUC oil and gas wells in December.

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Gasoline Futures Surge 12% in December to New High

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

The gasoline futures contract traded on the New York Mercantile Exchange surged 12% in December, with reformulated blendstock for oxygenate blending futures establishing a new calendar year high for 2016 at $1.7038 gallon between the Christmas and New Year’s Day holidays. Gasoline futures outpaced the advance by West Texas Intermediate and ULSD futures in December which both rallied 9%, as bullish sentiment took control of the market.

Spurring the market’s bullish psychology were agreements to reduce production by the Organization of the Petroleum Exporting Countries on November 30 joined by a companion pact on December 10 when 11 non-OPEC producing countries also agreed to cut output. Combined, the two agreements call for a 1.758 million bpd cut in production that, if adhered to, would push global oil demand over production midyear, according to several analysts including the International Energy Agency.

The agreements took effect January 1 and are for six-month terms, although country commitments call for an average at the quota level to be reached by June, so some production cuts might not start right away. This feature could puzzle analysts during the interim as they scrutinize monthly production data for compliance, likely sparking increased price volatility.

Noncommercial traders, also known as speculators since they are not using a futures contract to underpin a physical position in the underlying market, covered short positions and accumulated long positions in NYMEX RBOB futures in reaction to the November 30 agreement. A long position is taken on expectation prices would move higher over time.

A rebalancing market will still need to contend with an abundant quantity of oil in inventory. However, the production cuts would gradually chop down the mountain of supply that has grown over the past couple of years and, in turn, underpin a higher global oil price.

This expectation was lent support late in 2016 on a string of data suggesting a quicker expansion of the US economy in 2017, with the Bureau of Economic Analysis in late December reporting a 3.5% annualized growth rate in US gross domestic product for the third quarter 2016–the largest quarterly expansion in two years. Greater economic activity consumes more oil.

The US Federal Reserve lifted the federal funds rate in December for only the second time in 10 years on evidence it finds supporting a stronger US economy that, in large part, propelled the US dollar to a 14-year high. Consumer confidence in the United States reached a12-year high in December, with a new administration in Washington, DC, seen creating broader economic opportunity.

A confident consumer is willing to spend more of his or her hard earned currency which bodes well for fuel retailers. As we look at RBOB futures forward curve, we see an increasing premium built into gasoline prices in early 2017 which reach the mid to upper $1.80 gallon range in April, May and June.

Climbing gasoline prices could erect a speed bump to higher sales volume for retailers and suppliers alike in 2017 should demand slow, as witnessed in in late 2016. Although implied gasoline demand set a record high in 2016, demand slowed late in the fourth quarter against the comparable year-ago period as gasoline prices gained.

EIA data shows during the four-week period ended December 23, gasoline supplied to market averaged 9.045 million bpd that, while a strong reading, trailed the same four weeks in 2015 by 260,000 bpd or 2.8%. For the year through December 23, implied gasoline demand averaged 9.367 million bpd, up 211,000 bpd or 2.3% against 2015.

The US average for regular grade gasoline sold at retail outlets reached a six-month high of $2.364 gallon on December 26, according to EIA data, 32.5cts above year prior. The lower price point in late 2015 was seen incentivizing demand.

In a recent note to clients, Tim Evans, futures specialist with Citi Futures, highlighted gasoline demand’s response to prices, saying, a decline in gasoline prices in 2015 lent support to demand with growth up as much as 3.4% in the 12 months ended in September 2015.

“Since then we’ve seen a slowing to 2.0% growth in the 12 months through September 2016. Looking ahead to next year,” said Evans on December 22, “we would not be surprised if growth slows to something more like 1.0-1.5%, a more sustainable pace in our view.”

Gasoline exports from the United States, which are included in the products supplied statistic, surged in 2016, reaching a weekly record high of 1.1149 million bpd in late December. Moreover, the trend looks sustainable, as US refineries produce more gasoline than needed by the domestic market amid the country’s oil and gas renaissance.

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 liberalizing its gasoline market, including on imports, which would aid US refineries that are producing well above their historical average.

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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.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

US Gasoline Prices Spike in Response to OPEC Deal

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

The January reformulated blendstock for oxygenate blending futures contract on the New York Mercantile Exchange settled at a better than five-month high on the spot continuous chart in concluding its first session as nearest delivery on December 1, continuing a midweek rally ignited by an historic agreement by the Organization of the Petroleum Exporting Countries (OPEC).

After two sessions, which included the expiration of the December RBOB contract on November 30, nearest delivered gasoline futures had rallied 16.99cts or 12.3% to $1.5470 gallon. The previous high settlement on the spot continuous chart was reached during the summer driving season on June 23 at $1.6035 gallon, less than 10 days after US gasoline demand reached a weekly record high of 9.815 million bpd, per data from the Energy Information Administration.

During their biannual meeting in Vienna on November 30, OPEC agreed to a 1.2 million bpd cut in their production to 32.5 million bpd that takes effect January 1, with the agreement creating a surge in futures trading.

The Chicago-based CME Group reported single-day volume traded in Energy-Complex products on November 30 at a record high 4,510,408, well above the previous record of 3,932,201 contracts on February 11. NYMEX West Texas Intermediate futures volume spiked to 2,530,530 contracts, soaring past the prior record of 1,861,909 contracts set the day following the presidential election on November 9.

WTI futures with nearest delivery topped $50 bbl for the first time in nearly six weeks on December 1, rallying $5.82 or 12.9% in two sessions to a $51.06 bbl settlement, and could test resistance near $60 bbl in the coming weeks.

Volatility in oil futures is expected to increase further following the OPEC agreement, which cuts production for the first time in eight years. OPEC expects another 600,000 bpd in production cuts from non-OPEC members, with Russia reportedly agreeing to reduce output by 300,000 bpd.

The quota agreement has a six-month term, with OPEC to review its affect and market conditions in May 2017.

The market will closely watch OPEC members for cheating, with the cartel having a checkered past in complying with quotas. Also, the 32.5 million bpd production quota, the low end of a pledge made by members in Algiers on September 28, doesn’t include Indonesia, which suspended its membership, so the production cut is less dramatic than the headline number. Secondary sources report Indonesia produced 722,000 bpd of crude oil in October.

The agreement is nonetheless significant and seen aided by strong growth in oil demand from the United States. However, the upside in crude values is also expected to be limited, given ongoing excesses in global oil supply, with US commercial crude inventory at 488.1 million bbl on November 25, 30.9 million bbl or 6.8% more than the comparable year ago period, data from the EIA shows.

Moreover, US shale oil producers whom have already been reactivating rigs that helped boost domestic production to an 8.699 million bpd 5-1/2 month high during the Thanksgiving Day holiday week and 271,000 bpd above a 26-month low plumbed in the final days of the second quarter, are seen as benefactors of OPEC’s cut. Many more wells are seen economical with WTI at $55 to $60 bbl that would add oil to the market and slow the draw down in bloated inventory.

Gasoline economics are healthy in the United States amid ample crude supply and strong demand both domestically and for exports. Statistics from the EIA for September, the most recent monthly data available, shows U.S. refinery and blender net production of finished gasoline was 10.3 million bpd in September, 303,000 bpd above a year ago.

“Refinery output remains strong even in the late fall; the first two weeks of November had a net output of 10.5 million b/d and 10.2 million b/d, respectively, compared with output of 9.7 million b/d and 9.6 million b/d for the same weeks last year,” said EIA in a weekly report November 30.

After nearly 11 months, gasoline supplied to the primary market has averaged 9.394 million bpd, 250,000 bpd or 2.7% above the corresponding period in 2015. EIA shows gasoline exports averaged 564,000 bpd in September, up 208,000 bpd from September 2015, with 60% of the country’s gasoline exports that month sent to Mexico.

Another dynamic in a busy November for the oil market was an increase in the required amount of renewables in the transportation sector from a May proposal. On November 23, the Environmental Protection Agency finalized the 2017 Renewable Volume Obligation for the nested renewable fuel category which is overwhelmingly satisfied by conventional corn-based ethanol at the 15 billion gallon statutory level, 200 million gallons more than proposed in May.

Tradable D6 Renewable Identification Numbers, credits obligated parties under the Renewable Fuel Standard–refiners, importers and blenders–submit to the EPA to show compliance again spiked above $1, surging nearly 30cts or 38% from a mid-November low to $1.07 on December 1.

The blend wall, which refers to the 10% maximum ethanol content level in gasoline that can be used in all vehicles on US roads, remains an impediment in adding more ethanol to the gasoline pool even as the mandate to do so expands, spiking RIN values.

In a November 28 blog from consulting engineers Turner, Mason & Company, they project ethanol in the gasoline pool at 14.771 million gallon or 10.18% in 2016 compared to 13.59 million gallons or 10.16% in 2012.

“The percentage of ethanol in the gasoline pool has stayed remarkably constant over the past five years. The general conclusion is that the blend wall is still a limitation and demand for E15 and E85 has not grown significantly,” explain the consultants.

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Colonial Pipeline Explosion Spikes Gasoline Futures

Within minutes of taking over as the nearest delivered contract in the evening hour of October 31, December RBOB futures spiked 18.56cts or 12.8% to a five-month high on the spot continuous chart of $1.6351 gallon in trading on the New York Mercantile Exchange triggered by the second outage on the ever important Colonial Pipeline in less than two months.

rbob-15-minute-price-chart

A crew working on main Line 1, a massive 40-inch pipeline with a flow rate of 1.37 million bpd that transports gasoline, struck the pipeline with a track hoe and caused an explosion and subsequent fire. One worker was killed and five were hospitalized.

The accident occurred in Shelby County, Alabama, several miles away from a pipeline rupture discovered September 9 that shut Line 1 which later operated with restricted service for nearly two weeks through September 21. Roughly 252,000 gallons of gasoline leaked from the rupture, with Colonial constructing a 500-foot above ground bypass around the leak to restore full service. The bypass was set to be removed sometime between November 2 and 10.

Colonial Pipeline again shut Lines 1 and 2 October 31, with the latter a 36-inch pipeline that transports distillate fuels, including diesel, heating oil and jet fuel. Line 2 has a 1.16 million bpd flow rate. Both Lines 1 and 2 originate in Houston, Texas, and run in a northeast direction to Greensboro, North Carolina, the location of a tank farm and interconnection point on the Colonial system. From Greensboro, Line 3 runs to Linden, New Jersey, and Line 4 to Dorsey, Maryland, both 32-inch pipelines.

The Colonial Pipeline is a critical conduit for delivering refined fuels to states along the eastern seaboard, with the 2.5 million bpd 5,500 mile pipeline consistently running at or near full capacity, and connects 29 refineries and 267 wholesale distribution terminals. Refined fuels from the Gulf Coast are needed by states along the Atlantic Coast as well as imports because the region lacks sufficient refining capacity.

December RBOB futures would pare the advance as the November 1 session wore on, settling 6.46cts higher at $1.4841 gallon, dropping back nearly 6.5cts shortly after the noon hour as Colonial Pipeline said it had returned its main Line 2 to service and that it believed it would restore service on its main Line 1, which was still on fire at the time of the update, by November 5.

Nearest delivered RBOB futures traded in a 19.51cts range November 1, the widest spread since a 20.88cts daily range October 31, 2012 amid a selloff ahead of a contract expiration. A month prior on September 28, 2012, nearest delivered RBOB futures traded in a 29.51cts range amid a short squeeze ahead of contract expiration, trading that day in a $3.1307 to $3.4258 gallon range.

In bulk wholesale spot trading on November 1, cash differentials rallied 4.0cts gallon or more for gasoline in the New York Harbor to amplify the advance by futures, with spot prices ending the session a dime or more higher in anticipation supply would tighten. In contrast, cash differentials weakened 4.75cts or more for gasoline in the Gulf Coast region to limit the gain in spot price to less than 2.0cts gallon, with concern supply could get bottled up in the region.

The 13-day disruption in September triggered an 8.475 million bbl or 13.2% draw down in PADD 1 East Coast gasoline supply during the week-ended September 16 to a 55.535 million bbl 22-month low according to the Energy Information Administration, with the region’s gasoline supply reaching a 72.493 million bbl 26-year high on July 22.

The large supply cushion in September joined by a surge in waterborne imports muted a greater price response, although retail prices in the Southeast jumped 9cts gallon during the disruption, and some retail outlets ran out of fuel.

During the five weeks since September 16, East Coast gasoline supply has increased 7.34 million bbl to 62.874 million bbl. If Colonial can restore service on the main gasoline line by November 5, the price impact will be limited and RBOB futures have likely installed its high in response to the outage during the early moments of the November 1 session.

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Recent Surprises Turn Oil and Gas Market Bullish

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

Addressing recent events transforming the U.S. oil and gas market

Inventory Decreasing

Unexpected surprises continue for the U.S. gasoline market in 2016, this time with gasoline prices underpinned as an inventory surplus was sharply cut. The East Coast has been affected in particular, with gasoline supply plummeting from a 36-year high to a 21-month low.

With record high gasoline production holding supply well above the historical average in 2016, what has finally shifted the market from bearish to bullish?

OPEC Production Cuts

With an ongoing imbalance threatening to press global oil prices lower still, OPEC decided on Sept. 28 to cut production. Admitting that the imbalance of global oil supply-demand would indeed continue well into 2017, the 14-country member finally agreed to reduce production – the first cut in eight years.

Beginning this November, OPEC ministers have agreed to a production range between 32.5 and 33.0 million bpd in contrast to their August output of roughly 33.3 million bpd. Details to these cuts will come about when OPEC meets in Vienna on Nov. 30.

Colonial Pipeline Leak

On Sept. 9, a leak was found on the Colonial Pipeline’s 36-inch gasoline main line 1 in Alabama that disrupted service. Not returning to full service until Sept. 21, the Southeast north through the mid-Atlantic saw limited new gasoline supply which led to steep drawdowns in regional stocks.

This caused supply shortages, namely in the Southeast..

Natural Disasters

The first hurricane in 11 years to make landfall in Florida, hurricane Hermine disrupted shipping lanes and sea-to-shore off-loading after it hit on Sept. 2. This natural disaster drew dawn East Coast gasoline supply 2.284 million bbl to 64.894 million bbl during the week ending Sept. 2 and another 884,00 bbl by Sept. 9.

Both the pipeline and hurricane disruptions occurred in the midst of transition when refiners were moving out summer grade product to make room for winter grades – leading to a drop of nearly 6.0 million bbl in PADD 1C, the Lower Atlantic, according to the EIA. This drop in the region’s supply was the largest on record and well above the previous large drawdown in June of 2003 of 2.9 million bbl.

National Gasoline Outlook – Supply Demand Leveling

In light of a second hurricane in the past two months, this time Matthew – category 4, shipping lanes and pipeline service had again been disrupted. With East Coast supply taking another hit, gasoline prices have increased as decreasing supply combats the imbalance seen over the past year. This decrease in supply and climb in price has been another bullish factor underpinning higher fuel prices.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

US Gasoline Market’s September Surprise(s)

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

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

In a year when soothsayers’ crystal balls are as foggy as London in November, September encompassed a few unexpected surprises for the US gasoline market that underpinned gasoline prices and sharply cut down an inventory surplus. This was especially true for the East Coast, where gasoline supply plunged from a 26-year high to a 21-month low.

At $1.4631 gallon, Reformulated Blendstock for Oxygenate Blending futures traded on the New York Mercantile Exchange ended the third quarter 20cts higher than in 2015 and flat with the end of the second quarter. The gasoline contract advanced nearly 15cts gallon on the spot continuous chart from the end of July–the height of peak season demand, with implied gasoline demand averaging 6.7% above the five-year average from Memorial Day through Labor Day.

Speculators in late September where far more bullish then in late July, moving to a 63,592 net-long position in NYMEX RBOB futures as of Sept. 27 data from the Commodity Futures trading Commission shows, which was the largest long position for the noncommercial group since a week before the start of Memorial Day on May 23. The noncommercial group made a 43.8% net-change in their long stance from the middle of summer, adding 19,378 futures contracts to the long side of their ledger since July 25.

Two well publicized events and a hurricane transformed the bearish oil market briefly experienced in early August, while another powerful hurricane, Matthew, has the potential to disrupt shipping lanes along the eastern seaboard in October.

OPEC Production

Initially, it was seen mostly as empty rhetoric and posturing as oil ministers with the Organization of the Petroleum Exporting Countries discussed production cuts in August and September to help stabilize the oil market, where an ongoing imbalance threatens to press global oil prices lower. Growth in world oil demand was slowing, inventory continued to build, and production was well above previous expectations. Indeed, OPEC was producing at an eight-year high, with Saudi Arabia at an all-time high, while output from non-OPEC producer Russia was near a post-Soviet high. US crude output declined less than expected, and producers were reactivating oil rigs, with the US rig count reaching a 7-1/2 month high in ending September, according to Baker Hughes, Inc.

Yet, OPEC reached a consensus to cut production on Sept. 28, admitting that a global oil supply-demand imbalance would persist well into 2017 without action by the 14-country member producer group, pushed back from previous forecasts for the market to find balance during the second half of this year. The OPEC agreement to cut production is the first in eight years.

OPEC ministers agreed to a production range between 32.5 and 33.0 million bpd from their August output of roughly 33.3 million bpd, but will leave the details on how those cuts will come about when they meet in Vienna on Nov. 30. The reduced production would begin in November, another feature that has some analysts downplaying the news. However, the Saudis are seen shouldering most of the cuts, and are said to be concerned that a low oil price would diminish their expected return from a 2017 planned initial public offering for a stake in Saudi Aramco.

A leak found Sept. 9 on Colonial Pipeline’s 36-inch gasoline main line 1 in Alabama, which didn’t return to full service until Sept. 21 when a bypass around the leak was placed into service, limited gasoline supply in the Southeast north through the Mid-Atlantic, prompting sharp drawdowns in regional supply. The roughly 1.272 million bpd main line 1 originates in Houston, Texas, and ends in Greensboro, North Carolina, where it interconnects with main lines 3 and 4 on the Colonial system, with line 3 running north to Linden, New Jersey.

Total PADD 1 East Coast gasoline supply was drawn down from a 72.493 million bbl 26-year high reached July 22 to 55.535 million bbl on Sept. 16, the lowest supply point for the region since December 2014.

Weather and Gasoline Supply

Hurricane Hermine, which on Sept. 2 was the first hurricane in 11 years to make landfall in Florida, disrupted shipping lanes and sea-to-shore off-loadings. East Coast gasoline supply was drawn down 2.284 million bbl to 64.894 million bbl during the week ended Sept. 2 and by another 884,000 bbl by Sept. 9.

The hurricane and pipeline caused declines also occurred during the transition to higher Reid vapor pressure gasoline, when refiners move out summer grade product to make room for winter grades. Yet, EIA notes during the week ended Sept. 16, gasoline supply in PADD 1C, the Lower Atlantic, dropped nearly 6.0 million bbl to 22.0 million bbl. Before that decline, the largest weekly draw for Lower Atlantic states was 2.9 million bbl in June 2003.

This week, market followers will follow the path of Hurricane Matthew, which reached Category 4 strength on Oct. 2 when situated just south of Jamaica. Current forecasts show a path for the slow moving storm along the Atlantic Coast, which would again disrupt shipping lanes.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

Short Squeeze Rallies Gasoline in August

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices | Brian L. Milne, Energy Editor, Product Manager with Schneider Electric

August marked the second highest market participation rate for the Reformulated Blendstock for Oxygenate Blending futures contract traded on the New York Mercantile Exchange on record, with a sleepy oversupplied gasoline market enlivened by speculation of upcoming coordinated action by the Organization of the Petroleum Exporting Countries to boost global oil prices.

Data on futures positions from the Commodity Futures Trading Commission shows noncommercial traders, also known as speculators since they are not using the futures contract to hedge an underlying physical position, reduced a net-long position in RBOB futures in late July to the lowest point in more than a year. A long position is taken on expectation for prices to move higher, so the liquidation of these contracts by speculators indicates a bearish sentiment for the US gasoline market.

As discussed in our previous blog, Summer Hope Dashed as Gasoline Supply Swamps Market, the gasoline market was under price pressure in July on bloated inventory and despite peak seasonal demand, with demand on pace to set a record high this year. The long liquidation in July as evidenced in CFTC’s Commitment of Trader’s reports left the market vulnerable for a price rally.

The bearish sentiment for gasoline futures in ending July was appropriate given the market’s fundamental disposition. Despite record high summer demand, gasoline inventory had increased for three consecutive weeks through July 22 to reach a nearly three-month high of 241.5 million bbl, sitting 25.3 million bbl or 11.7% above the five-year average, data from the Energy Information Administration shows.

As the August RBOB futures contract expired on July 29, the market was also confronting the seasonal change that occurs in September, with gasoline demand consistently lower in September compared with August. Hope that low retail prices would spur enough demand to shrink the oversupplied market was evaporating, and speculators were selling out of the market.

Nearest delivered RBOB futures fell to a $1.2760 gallon four-month low on July 29, but pared the loss to settle at $1.3210 gallon. Twenty trading days later, nearest delivered RBOB futures rallied to a $1.5257 gallon two-month high, spurred by belief OPEC members would agree to freeze their production when they met in late September in Algiers for informal talks on the sidelines of the International Energy Forum.

CFTC data shows noncommercial market participants increased their net-long RBOB futures position 30.8% from July 25 to August 22 to a 57,829 near two-month high. The CFTC also shows RBOB futures open interest, which measures the number of unliquidated, outstanding contracts on a given day, surging above 400,000 in mid-August. The prevailing high was reached in March during the preseason rally.

Speculation for an OPEC agreement was fraying in late August following comments from Iraq, Iran and Saudi Arabia, not to mention that OPEC production was at an eight-year high in July and Saudi output reached a record high. Iraq indicated it would cooperate in the September talks, but continues to ramp up output, and Iran restated its goal of securing market share lost during years of Western sanctions on its exports, planning to ramp up production another 200,000 bpd. The Saudis said they don’t have a production target, with their output set by customer demand.

Weekly data from the EIA showing US commercial crude oil supply increased to a 525.9 million bbl two-month high on August 26 and US dollar strength joined the market’s diminishing expectations for meaningful action to be taken by OPEC to press NYMEX RBOB futures to its third consecutive session loss on August 31. The September RBOB contract expired down 3.61cts at $1.4122 gallon, although nearest delivered RBOB futures ended August 9.12cts or 6.9% higher.

October RBOB futures settled at a 7.88cts discount to the now expired September contract on August 31, reflecting the seasonal transition to slower demand and higher Reid vapor pressure gasoline, which is easier and cheaper to produce than the summer grades. The market’s again in position to test the July low.

Yet, as the short squeeze in August demonstrated, speculation could again reverse the market. OPEC is still scheduled to discuss coordinated action to stabilize oil prices in Algiers September 26-28, and hurricane activity in the Atlantic Basin peaks in August and September.

To learn more about Schneider Electric’s energy and commodity trading platform, DTN ProphetX click here.

End of Summer Sees Swamped Fuel Market, Low Prices

Schneider Electric’s Brian Milne addresses high supply and demand

Inventory Buildup in Gasoline

With U.S. gasoline inventory increasing through mid-summer, an unexpected buildup has occurred – upending the outlook for a balance between supply and demand during the second half of 2016. As of August 5, national gasoline inventory totaled   235.4 million bbl, according to the Energy Information Administration, 9.2 percent above year prior. Record high production and an above average import rate partly due to a strong dollar are both factors for the large supply overhang. Moreover, the market is oversupplied despite strong demand that’s on pace to set a record high in 2016.

What’s driving gasoline demand?

Gasoline Demand and Elasticity

Dropping below the year ago-weekly rate only three times since mid-May, data from the EIA shows a record pace for gasoline supplied to market. Cumulatively, U.S. implied gasoline demand is 3.7 percent above the comparable year ago period through the end of July and an astounding 7.0 percent more than the five-year average, a 614,000 bpd increase.

 This demand increase stems from low retail prices spurred by a high level of gasoline inventory and declining unemployment meaning more road travel, resulting in record high demand. The strong demand rate amid low prices and an improving employment picture serves as testament to gasoline’s elasticity in the United States

Why are US gasoline imports so strong when domestic supply is at a surplus?

A combination of high gasoline supply internationally and a strong dollar has lured more imports to U.S. shores.  Increased refining capacity in the Middle East and Asia has boosted the amount of available gasoline globally, bolstering competition among suppliers to boost US gasoline imports. Global economic headwinds have also prompted central banks around the world to lower interest rates and adopt policies to stimulate their economies that, in turn, weakens their currencies. In this environment, the US dollar has strengthened against rival currencies and attracted a higher level of gasoline imports than usual.

National Gasoline Price Outlook – Still Dropping

Oil prices remain volatile, but Milne expects crude prices to drop into a $35-$40 per barrel range as peak summer driving demand ends and refiners shut units for seasonal maintenance. With a current national average price of around $2.15 per gallon for regular grade in early August, gasoline prices are expected to slide another $.30 to around $1.85 per gallon late in the third quarter, early fourth quarter.

About Brian Milne

Brian Milne has been involved in energy for 20 years as a journalist, editor and analyst covering all types of US energy markets. He is the editor of Schneider Electric’s MarketWire—a real-time market and news service focused on US oil product markets and relevant news and analysis. Milne is frequently quoted in newspapers and trade journals, including the Wall Street Journal, Barron’s, USA Today, and MarketWatch.