Speculators Unload Long Positions in Gasoline Contract

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

Speculators holding positions in the US gasoline contract unwound 30% of their bets that gasoline prices in the United States would increase, with the gasoline contract dropping to a 3-1/2 month low mid-July as the market looks to higher refinery runs offsetting peak seasonal demand.

Nearest delivered Reformulated Blendstock for Oxygenate Blending futures on the New York Mercantile Exchange dropped to $2.8552 gallon July 18, the lowest trade since April 2, with the decline slowed by technical support. The Energy Information Administration’s US average for all formulations of regular grade gasoline fell to a $3.635 gallon nearly 3-1/2 month low July 13, as wholesale costs are quickly passing through the supply chain.

The selloff from June highs follows easing concern over potential supply disruptions in Iraq while Libya boosts exports for the first time in months despite armed clashes. Global oil prices are again edging higher amid Israel’s operations against Hamas in Gaza and the downing of a civilian aircraft over eastern Ukraine held by separatists.

Gasoline and diesel prices in the US take their cue from global oil prices represented by the Brent futures contract trading on the ICE platform. The nearest delivered Brent contract plumbed a nearly 3-1/2 month low of $104.39 bbl July 14 before reversing, now trading near $107 bbl.

The refocus from geopolitical fueled threats to the security of oil supply to supply-demand fundamentals accelerated the decline in the NYMEX RBOB contract despite domestic supply holding below the year ago period consistently since mid-March. US gasoline supply has hovered on either side of the five-year average for the past four months.

US refiners are processing more crude however, spiking to 93.8% of plant utilization during the week-ended July 11, the highest run rate since June 2006. That compares with an 87.1% run rate averaged during the week-ended June 13. Refiners typically ramp up operations in the summer following maintenance during the spring and on higher driving demand.

The market expects refiners to continue running at a high utilization rate, churning out more gallons of gasoline. This expectation has offset peak seasonal demand for gasoline, which has also turned bearish in comparison with 2013.

Preliminary data from the EIA shows implied demand for gasoline up 1.5% for the year through July 11 compared with the comparable timeframe in 2013 however year-on-year growth has reversed early summer. For the four-week period ended July 11, implied gasoline demand is down 0.7% versus a year ago.

Weighing this evidence, noncommercial market participants, known as speculators since they are not using the futures contract to hedge an underlying physical position in the market, slashed a net-long position 30% during the week-ended July 14 from a seven-week high to a better-than five-month low, according to the Commodity Futures Trading Commission.

Positions held by the noncommercial trade category are closely watched for a turn of sentiment, with speculators in the best position to move in-and-out of futures positions since they are not a hedge. While sentiment for gasoline has turned bearish, the steep net-long drop off by speculators does expose the RBOB contract to a rally on short covering if the downside is viewed as overdone. The relative strength index, a momentum indicator, shows the RBOB futures market a whisker above oversold.