Have Gasoline Futures Reached a Bottom?

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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

Despite a 2.2% rally on expiration day by the February gasoline futures contract traded on the New York Mercantile Exchange in closing out January, gasoline futures with nearest delivery ended the month down 16.4cts or 12.9% at $1.1031 gallon, with renewed selling ushering in February. Nearest delivered gasoline futures broke below $1 gallon during the final week of January, trading at a $0.9924 better-than seven-year low on January 27.

Nonetheless gasoline futures, known as the Reformulated Blendstock for Oxygenate Blending contract, should find some price support relative to crude oil with the start of the refinery maintenance season and the transition to lower Reid Vapor Pressure specifications, with lower RVP gasoline more costly to produce. RVP ratings measure the release of harmful emissions from gasoline referred to as volatile organic compounds, which occur more readily in warmer weather.

The forward curve—the value of futures contracts for later delivery, suggests nearest delivered RBOB futures plumbed a seasonal low in late January, with the March contract trading at a more than 20cts gallon discount to April delivery and through the summer months. In years past, the calendar spread illustrated the winter-to-spring rally by RBOB futures, with the combination of refinery maintenance, the RVP transition and expectations for greater driving demand as the weather turns warmer pushing gasoline prices higher.

Yet 2016 has already demonstrated insolence for history and past practice, with global equity markets in turmoil, a rebellious US presidential race that has confounded political pundits, and what some analysts suggest is a reordering of world order serving as exhibits a, b and c. Oh, and US crude production in mid-January is on par with a year ago at 9.221 million bpd, up 8,000 bpd from January 2014, despite 807 fewer rigs looking for oil, data from the Energy Information Administration and Baker Hughes Inc., respectively, shows.

Economic Picture of Gas Demand

An economic picture, although starting to blur, does support expectations for robust gasoline demand in the United States, with consumer confidence reaching a three-month in January according to the Conference Board’s Consumer Confidence Index, with lower gasoline prices supporting sentiment. Consumer spending continues to increase, albeit at a slower pace than market expectations, with more citizens banking their savings from lower fuel costs.

Meanwhile, low retail gasoline prices, at a seven-year low well under $2 gallon, also act as a stimulus for greater driving. However, the economic backdrop is cluttered, with US manufacturing contracting for the fourth consecutive month in January, and fourth quarter 2015 US gross domestic product reported at a meager 0.7% annualized growth rate.

Prices for the benchmark crude contracts, West Texas Intermediate on NYMEX and Brent crude futures on the IntercontinentalExchange, have advanced from better-than 12-year lows in the mid to upper $20s bbl to the mid-$30s bbl before slipping to the low $30s bbl on the first day of trade in February. Crude prices are again expected to come under pressure during the refinery maintenance season, when refiners cut back on buying crude amid unit outages. The cutback in crude buying is expected to accelerate supply building, with US commercial inventory already at a record high of 494.9 million bbl on January 22, and set to top 500 million bbl.

The EIA tells us crude costs accounted for 42.2% of the price of each gallon of gasoline sold at retail outlets in December 2015, down from 46.1% in November, and well below December 2014 when crude costs made up 56.7% of each gallon of gasoline sold at the pump. In fact, the smaller share of crude costs in December’s gallon of gasoline was the lowest since June 2004 when it was 40.4%.

Since January 2000, crude costs accounted for as much as 80% of each gallon of gasoline at the retail level in December 2011 and the lowest in May 2001 at 35%, so gasoline prices can and do diverge from the crude price pattern.

Still, US gasoline inventory was tallied last at 248.5 million bbl on January 22 by the EIA, the largest amount of gasoline supply held since early 1990. Meanwhile, even though US consumers have been purchasing more pickup trucks and SUVs with the collapse in crude prices, these vehicles remain more efficient than previous models, with the EIA most recently forecasting a modest 70,000 bpd or 0.8% year-on-year increase in US gasoline demand in 2016 after 2015’s 270,000 bpd or 1.4% expansion.