Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
The freefall in New York Mercantile Exchange traded gasoline futures looks to have been arrested, halted near long-term support at $2.1354 gallon after nose diving 62.3cts or 23% from a late September high to mid-October low. Retail prices have more downside.
NYMEX Reformulated Blendstock for Oxygenate Blending traded at a nearly four-year low on the spot continuation chart of $2.1347 Oct. 16, and challenged the low in the following week before rebounding into the upper teens. The support point represents the 50% retracement level form the late 2008 low of $0.7850 gallon to the 2011 high of $3.4789 gallon. If support at this level fails the futures contract could drop to the low $1.80s gallon.
The market’s response seems, however, to suggest otherwise, with speculators boosting their net-long position to a 3-1/2 month high during the week-ended Oct. 21 data from the Commodity Futures Trading Commission’s Commitment of Traders report released Oct. 24 shows. A long position is taken on the expectation prices would move higher over time.
“Money managers seemingly view RBOB as a bargain, increasing net long positions above the 10-week average level,” said Tim Evans, Energy Futures Specialist with Citi Futures and OTC Clearing in an Oct. 24 note to clients.
Retail gasoline prices are another story, with pass through costs still working their way through the supply chain. At $3.12 gallon on Oct. 20, the Energy Information Administration’s US gasoline average for all formulations of regular grade gasoline is down 23.4cts or 7% since Sept. 29.
A 23% decline from the Sept. 29 average of $3.354 gallon would press the average down to $2.584 gallon, yet that won’t occur. The average is, however, on a quick trajectory to break below $3.00 gallon for the first time since December 2010, and will likely slide to either side of $2.90 gallon by mid-November.
Historically, roughly 50% of the pass through costs from the wholesale market to retail occur within two weeks, but could take several weeks for the full decline or increase to be realized. Moreover, as wholesale prices move off lows, it slows the decline in retail prices.
Seasonally, gasoline is weak, although it has held above the five-year average for the two weeks ended Oct. 17—the first time over the average since late August. Cumulatively for the year through Oct. 17, implied gasoline demand is averaging 62,000 bpd or 0.7% more than during the same time period in 2013.
Gasoline inventories are also low, holding below the five-year average since early September EIA data shows. The deficit with the average widened to 4.7 million bbl as of Oct. 17—the most it’s been since mid-April. Since we’re in the seasonal refinery maintenance season, this deficit could widen and support higher RBOB futures.
During the turnaround season, oil products find upside price support from less processing while crude values are typically under pressure in comparison due to less refiner demand for crude. Consider US crude inventory built up 16 million bbl during the two weeks ended Oct. 17 while gasoline stocks were drawn down 5.3 million bbl.
This dynamic supports crack spread trading in which a market participant buys RBOB futures while selling WTI contracts. On Oct. 15, the gasoline crack fell to an $8.47 bbl one-year low, while ending trade Oct. 24 at $10.62 bbl. In 2013, the gasoline crack rallied 270% from $5.68 bbl on Oct. 4 to $21.03 bbl on Nov. 27.