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.

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.

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

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.

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