Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
The US average price for regular grade gasoline sold at retail outlets across the country edged up 0.5cts to $3.459 gallon on Labor Day according to the Energy Information Administration’s weekly survey, with the increase the first in 10 weeks. The slightly higher retail average came alongside the highest weekly demand rate for the motor transportation fuel since July 2010 while domestic supply tied for the 2014 low.
Sounds pretty bullish, except the data reflects the final week of the summer driving season in the US, with gasoline demand consistently lower in September from August, while the gasoline futures market traded on the New York Mercantile Exchange swung to a 10-month low one day after Labor Day. Retail gasoline prices are again set to decline.
EIA reported implied demand for gasoline averaged 9.48 million bpd during the week-ended Aug. 29, 121,000 bpd or 1.3% above the previous 2014 high reached one-month earlier and 170,000 bpd or 1.8% more than during the week leading up to the Memorial Day weekend holiday.
It’s important to consider the implied demand data, while providing a quick look at the gasoline market’s supply-demand balance, does not reflect end-user consumption but instead product delivered to the primary market. The sharp boost in the implied demand figure most likely reflects real consumption alongside downstream supply positioning before the busy holiday driving weekend. Consider the implied demand figure fell 206,000 bpd or 2.2% in the week following the Memorial Day weekend and dove another 480,000 bpd or 5.3% a week later, although retail gasoline prices were moving higher at that point amid the Sunni insurgency in Iraq that posed a serious threat to the country’s oil production.
In fact, it’s been a relatively disappointing summer for those looking to sell more gallons of gasoline to consumers, with implied demand down 0.7% in August compared with year prior although 1.0% higher for the first eight months of 2014 versus a year ago.
US gasoline supply has moved closely with the five-year average since late in the second quarter to limit the decline in gasoline values. And while supply declined to a low for the year at 210 million bbl late August, it continues to follow its seasonal pattern, likely dropping further as refinery maintenance during autumn idles units and limits processing. Meanwhile, refiners are now transitioning to higher Reid Vapor Pressure gasoline which is less costly to produce than the more environmentally stringent summer blends, another reason to work down supply.
Whether it is supply, demand or price, the charts tell the story, as they did in ushering in September.
October took over as the nearest delivered NYMEX gasoline (Reformulated Blendstock for Oxygenate Blending) futures contract in September after the September contract expired Aug. 29, with the price of nearby delivery gapping 12.1cts lower on what’s called the spot continuation chart. Consider the now expired September RBOB contract traded at a $2.79 gallon high Aug. 29 while the October RBOB contract traded at a $2.5391 gallon low during the next trading session Sept. 2. That’s some spread, with technicians referring to the difference between a low to the next session’s high (or vice versa) between changing monthly contracts as a seasonal gap, reflecting the transition into a new dynamic for fundamentals.
With history as our guide, look for retail prices to make a steady downward march through to November, likely pressing the national retail average below $3.20 gallon or more. In 2013, the average set a low at $3.194 gallon on Nov. 11. This year, and absent some major global event, we could plumb an even lower low.