Gasoline futures values surged to a high last seen in July 2013 on Apr. 24 before dropping back while the US retail average has now advanced for 11 consecutive weeks and counting, although the preseason rally for gasoline looks to be in its twilight while the domestic supply of crude oil reached its highest point since 1931.
As often is the case the gasoline market is in a tug-of-war, this time between climbing prices for global crude oil amid increased geopolitical risk now embedded in its value due primarily from the Ukraine crisis, while US domestic crude prices come under pressure from a growing flood of supply increasingly bottled up in the Gulf Coast.
On Monday (4/28/2014), the United States implemented additional sanctions on seven Russian officials and 17 companies that are reportedly part of Russian President Vladimir Putin’s inner circle for failing to abide by a recent international agreement to work to deescalate the crisis in Ukraine. Instead, Washington said Russia has intensified its efforts to destabilize parts of eastern Ukraine while Russian troops wait on the Ukraine-Russian border appearing ready to move into Ukraine as they recently did in Crimea.
Analysts worry the crisis will worsen, potentially threatening oil and gas supply from Russia to Europe, rallying Brent crude oil. The Brent contract, which trades on the ICE Futures platform, rallied to a $110.65 bbl six-week high Apr. 24. In contrast, West Texas Intermediate crude futures which trade on the New York Mercantile Exchange were holding just above $100 bbl and at a three-week low at the time of this writing, pressured by the highest supply level, 397.7 million bbl, since the Great Depression, according to data from the Energy Information Administration.
US crude production, last reported by EIA at 8.36 million bpd, continues to increase, growing with new production in the Williston Basin in North Dakota and the Eagle Ford in west Texas. Amid new infrastructure installed over the past few years, crude supply is increasingly positioned in the Gulf Coast refining center. Since the US has a ban on exporting crude oil, Gulf Coast supply has ballooned to their highest level on record at 209.61 million bbl. (EIA records for this category date back to 1990).
The higher Brent value amid the geopolitical tension and pressure exerted on WTI crude amid growing US supply widened the spread between the two crudes to an $8.58 bbl five-week high for the Brent premium. Brent crude is used in determining gasoline and diesel spot pricing in the United States.
The nearest delivered futures contract for Reformulated Blendstock for Oxygenate Blending on NYMEX rallied to a $3.1128 gallon nine-month high before dropping back ahead of the May contract’s expiration Wednesday (4/30), with the market in a seasonally bullish backwardated structure.
The gasoline contract increases from winter lows through the spring in anticipation or higher demand as the weather warms and with the change in fuel specification from winter grade gasoline to more costly to produce summer blends. Refineries also shut for seasonal maintenance from late winter through spring.
Now, refiners are returning from maintenance, with the EIA reporting the run rate reaching 91% during the week-ended Apr. 18—the highest utilization level since the first week of 2014. Implied gasoline demand also dropped sharply that week to an 8.43 million bpd seven-week low. Gasoline stocks continue to be drawn down, now nine successive weeks to a better-than five-month low at 210.0 million bbl.
The stocks draws should reverse with the ramp up in processing as US refineries while gasoline demand remains sluggish despite outpacing the comparable year-ago period by 0.6%, although down 2.5% versus the five-year average. Expectations are for gasoline demand to firm in the coming weeks, with peak demand seen during the summer.
Wholesale gasoline prices were mostly higher during the week-ended Monday, which should push the US retail average for regular grade gasoline to its twelve consecutive weekly price gain. The EIA’s national average reached a $3.683gallon 11-month high on Apr. 21, 14.7cts higher than a year ago.