Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
August marked the second highest market participation rate for the Reformulated Blendstock for Oxygenate Blending futures contract traded on the New York Mercantile Exchange on record, with a sleepy oversupplied gasoline market enlivened by speculation of upcoming coordinated action by the Organization of the Petroleum Exporting Countries to boost global oil prices.
Data on futures positions from the Commodity Futures Trading Commission shows noncommercial traders, also known as speculators since they are not using the futures contract to hedge an underlying physical position, reduced a net-long position in RBOB futures in late July to the lowest point in more than a year. A long position is taken on expectation for prices to move higher, so the liquidation of these contracts by speculators indicates a bearish sentiment for the US gasoline market.
As discussed in our previous blog, Summer Hope Dashed as Gasoline Supply Swamps Market, the gasoline market was under price pressure in July on bloated inventory and despite peak seasonal demand, with demand on pace to set a record high this year. The long liquidation in July as evidenced in CFTC’s Commitment of Trader’s reports left the market vulnerable for a price rally.
The bearish sentiment for gasoline futures in ending July was appropriate given the market’s fundamental disposition. Despite record high summer demand, gasoline inventory had increased for three consecutive weeks through July 22 to reach a nearly three-month high of 241.5 million bbl, sitting 25.3 million bbl or 11.7% above the five-year average, data from the Energy Information Administration shows.
As the August RBOB futures contract expired on July 29, the market was also confronting the seasonal change that occurs in September, with gasoline demand consistently lower in September compared with August. Hope that low retail prices would spur enough demand to shrink the oversupplied market was evaporating, and speculators were selling out of the market.
Nearest delivered RBOB futures fell to a $1.2760 gallon four-month low on July 29, but pared the loss to settle at $1.3210 gallon. Twenty trading days later, nearest delivered RBOB futures rallied to a $1.5257 gallon two-month high, spurred by belief OPEC members would agree to freeze their production when they met in late September in Algiers for informal talks on the sidelines of the International Energy Forum.
CFTC data shows noncommercial market participants increased their net-long RBOB futures position 30.8% from July 25 to August 22 to a 57,829 near two-month high. The CFTC also shows RBOB futures open interest, which measures the number of unliquidated, outstanding contracts on a given day, surging above 400,000 in mid-August. The prevailing high was reached in March during the preseason rally.
Speculation for an OPEC agreement was fraying in late August following comments from Iraq, Iran and Saudi Arabia, not to mention that OPEC production was at an eight-year high in July and Saudi output reached a record high. Iraq indicated it would cooperate in the September talks, but continues to ramp up output, and Iran restated its goal of securing market share lost during years of Western sanctions on its exports, planning to ramp up production another 200,000 bpd. The Saudis said they don’t have a production target, with their output set by customer demand.
Weekly data from the EIA showing US commercial crude oil supply increased to a 525.9 million bbl two-month high on August 26 and US dollar strength joined the market’s diminishing expectations for meaningful action to be taken by OPEC to press NYMEX RBOB futures to its third consecutive session loss on August 31. The September RBOB contract expired down 3.61cts at $1.4122 gallon, although nearest delivered RBOB futures ended August 9.12cts or 6.9% higher.
October RBOB futures settled at a 7.88cts discount to the now expired September contract on August 31, reflecting the seasonal transition to slower demand and higher Reid vapor pressure gasoline, which is easier and cheaper to produce than the summer grades. The market’s again in position to test the July low.
Yet, as the short squeeze in August demonstrated, speculation could again reverse the market. OPEC is still scheduled to discuss coordinated action to stabilize oil prices in Algiers September 26-28, and hurricane activity in the Atlantic Basin peaks in August and September.