Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Gasoline prices in the primary wholesale spot market in the United States rallied on the final trading day of January on a spike by oil futures triggered by a weekly report on US rig drilling activity, an attack on the Iraq city of Kirkuk by the Islamic State, and a technical-driven short covering advance in closing out the first month of 2015.
It was a sensational rally taking place in the closing hour of the session, and ahead of the expiration of the February RBOB futures contract traded on the New York Mercantile Exchange that quickly spurred talk that the months’ long selloff in crude prices was coming to an end. That sentiment looks premature, with US crude production still seen growing despite a drop in rig activity to a three-year low, while global oil supply is seen gaining on demand at a 1.5 million bpd pace.
The oil futures market was heavily oversold, and end-month accounting reconciliation was clearly a factor in the intensity of the week’s 11th hour rally. However, seasonal factors for the gasoline market have moved to the fore, and are set to stop a steep downtrend in US retail gasoline prices that have pressed the average lower every week since the end of September 2014.
In expiring at $1.4153 gallon, the NYMEX February RBOB futures contract rolled off the board at a $0.30 gallon discount to the June contract, while the new nearest delivered March contract settled at a $0.22 discount to April delivery. The wide premiums in the calendar spreads are a seasonal feature that reflect the transition to a more costly to produce lower Reid Vapor Pressure gasoline, refinery turnarounds, and an expected increase in driving demand during the warmer spring and early summer months.
NYMEX RBOB futures typically plumb a seasonal low during the winter months of January or February, with driving demand curbed by the colder weather conditions. The RBOB contract traded at a nearly six-year low on the spot continuation chart on January 13 of $1.2265 gallon.
The pre-season rally in the gasoline market is a well-known market dynamic, and contract positioning to capture any advance is reflected in the latest Commitment of Traders report from the Commodity Futures Trading Commission. CFTC shows noncommercial traders, also known as speculators since they are not using a futures contract to hedge a physical position in the market, boosted a net-long position 9% during the week-ended January 27 to a nine-month high.
Absent spread hedging, a long position is taken on the expectation the value of the contract would increase over time. This sentiment by speculators is on display year over year, diminished during the tail end of the Great Recession in 2009. CFTC data also shows open interest, the number of outstanding futures contracts, at a nearly two-year high, with the higher volume of open interest identifying wide support for expected price gains in the gasoline market.
The US average for all formulations of regular grade gasoline reported by the Energy Information Administration has declined for 17 consecutive weeks, with EIA last showing a $2.044 gallon average on January 26, the lowest since early April 2009. The average is still on course to break below $2 gallon, which occurred last in March 2009, but the consistent string of weekly advances is set to end sometime in February.
Greater demand for gasoline amid the steeply lower gasoline price environment, a demonstration of the elasticity for the transportation fuel, offers another factor underpinning support for a slowdown in the price drop. EIA shows implied demand, the amount of gasoline supplied to the primary market, sharply higher against the year-ago and five-year average price points. Indeed, in 2014 implied gasoline demand registered its highest and second highest weekly averages during the final two weeks of the year, with the third highest demand rate realized during the final week of August.
That trend has continued into 2015, with implied gasoline demand during the first three weeks of the year averaging 685,000 bpd or 8.3% more than during the comparable year-ago period at 8.911 million bpd. The wide year-on-year gain partly reflects bitter cold and snow covered roads for a good part of the United States a year ago. Yet, in reviewing 2014 demand, the 9.022 million bpd average during the third week of January would not be topped until May 8.
Caution abounds however, with an ongoing glut in domestic and global crude oil to maintain pressure on prices, with some analysts still seeing a downside move by West Texas intermediate, the US crude price, and Brent crude, the international price marker into the low $30s bbl before the first quarter ends. The WTI contract swung to a nearly six-year spot low of $43.58 bbl in trading on NYMEX January 29, with Brent futures on the IntercontinentalExchange registering a $45.19 bbl nearly six-year low on its spot continuation chart January 13.