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.

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