Have US Gasoline Prices Peaked?

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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

Gasoline consumption in the United States this year is expected to climb to a record high, yet aside from some remaining pass through costs the US retail gasoline price average might be nearing a short-term peak as surplus inventory caps the upside.

Gasoline supplied to market has been strong, running 382,000 bpd or 4.3% above the 2015 pace this year through May 27 per Energy Information Administration data, and registering its second highest weekly demand rate in 2016 at 9.716 million bpd during the week leading up to the Memorial Day holiday weekend. The previous high in refinery gasoline shipments to market for the year at 9.755 million bpd was logged during the second week of May.

Now in the summer driving season in the United States when gasoline demand peaks, unofficially kicking off with the Memorial Day weekend, we should expect the weekly gasoline implied demand rate to remain strong. Low retail gasoline prices should continue to underpin demand growth for the road transportation fuel despite climbing 60.3cts or 33% from a late February low to $2.44 gallon on May 30, according to the EIA’s national gasoline average.

Still, gasoline demand sits on the other side of supply, and there’s plenty to be found. At 238.6 million bbl on May 27 inventory is in surplus, up 18.3 million bbl or 8.3% from the comparable week a year ago and 26.5 million bbl or 12.5% more than the five-year average.

In financial gasoline trading, an ongoing pullback in expectations for higher prices by speculators is a sign the pre-season gasoline futures rally has run its course while a flattened front end of the forward curve in the calendar spreads illustrates the price pressure by bloated inventory.

The most recent data from the Commodity Futures Trading Commission shows noncommercial traders, also referred to as speculators since they are not buying a futures contract to hedge an underlying position in the physical market, have reduced a net-long position in gasoline traded on the New York Mercantile Exchange for 13 consecutive weeks through May 31. Speculators have cut their net-long stance in NYMEX reformulated gasoline blendstock futures to the lowest point since November 2015.

NYMEX July and August RBOB futures were near parity in early June while RBOB is backwardated through the end of 2016, a market structure in which supply closest to delivery trades at a premium to deferred delivery. The flattened front end of the curve shows the market has no worries about having enough supply to meet demand this summer.

In Late May ahead of Memorial Day, NYMEX RBOB futures rallied to a $1.6664 gallon nine-month high on the spot continuation chart, holding below retracement resistance just under $1.70 gallon. On June 1, the RBOB contract traded at $1.5761, and has traded sideways since. Chart formations show limited firepower in pushing the RBOB contract above resistance near $1.70 gallon.

Complicating the outlook for traders was the Department of Labor’s US nonfarm employment report for May that was a shocker, blurring forward visibility on interest rates and economic growth.

Labor reported a 38,000 job gain for May on June 3, well below market expectations for a monthly employment increase of 158,000. Moreover, the department downwardly revised job gains for March and April by 59,000 and lowered the national unemployment rate 0.3% to 4.7%–the lowest since November 2007–as people dropped out of the workforce.

The report lowered expectations that the Federal Reserve would hike the federal funds rate, the overnight borrowing rate between banks that also determines interest rates for houses, automobiles and credit cards, to near zero and triggered a selloff in the US dollar. Although domestic crude oil typically trades inverse to the greenback, the jobs report also threw doubt upon the veracity of US economic growth.

Keep in mind US gross domestic product grew a modest 0.8% in the first quarter according to the Bureau of Economic Analysis, and labor statistics are a trailing indicator. Moreover, US employment was seen as a bright star for the economy in a cloudy sky, with weakness further signaled on slowing growth in the service sector.

Gasoline consumption is still expected to be strong, but sluggish economic growth would limit already poor demand for diesel fuel amid weak freight movements, tamping down overall demand for crude oil that would likely dent oil prices. If indeed Labor’s findings for May are the proverbial canary in the coalmine and not an anomaly, US consumers could again pullback the reins on spending and slow the growth rate in gasoline demand, too. Fuel prices would decline.

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