Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
The January reformulated blendstock for oxygenate blending futures contract on the New York Mercantile Exchange settled at a better than five-month high on the spot continuous chart in concluding its first session as nearest delivery on December 1, continuing a midweek rally ignited by an historic agreement by the Organization of the Petroleum Exporting Countries (OPEC).
After two sessions, which included the expiration of the December RBOB contract on November 30, nearest delivered gasoline futures had rallied 16.99cts or 12.3% to $1.5470 gallon. The previous high settlement on the spot continuous chart was reached during the summer driving season on June 23 at $1.6035 gallon, less than 10 days after US gasoline demand reached a weekly record high of 9.815 million bpd, per data from the Energy Information Administration.
During their biannual meeting in Vienna on November 30, OPEC agreed to a 1.2 million bpd cut in their production to 32.5 million bpd that takes effect January 1, with the agreement creating a surge in futures trading.
The Chicago-based CME Group reported single-day volume traded in Energy-Complex products on November 30 at a record high 4,510,408, well above the previous record of 3,932,201 contracts on February 11. NYMEX West Texas Intermediate futures volume spiked to 2,530,530 contracts, soaring past the prior record of 1,861,909 contracts set the day following the presidential election on November 9.
WTI futures with nearest delivery topped $50 bbl for the first time in nearly six weeks on December 1, rallying $5.82 or 12.9% in two sessions to a $51.06 bbl settlement, and could test resistance near $60 bbl in the coming weeks.
Volatility in oil futures is expected to increase further following the OPEC agreement, which cuts production for the first time in eight years. OPEC expects another 600,000 bpd in production cuts from non-OPEC members, with Russia reportedly agreeing to reduce output by 300,000 bpd.
The quota agreement has a six-month term, with OPEC to review its affect and market conditions in May 2017.
The market will closely watch OPEC members for cheating, with the cartel having a checkered past in complying with quotas. Also, the 32.5 million bpd production quota, the low end of a pledge made by members in Algiers on September 28, doesn’t include Indonesia, which suspended its membership, so the production cut is less dramatic than the headline number. Secondary sources report Indonesia produced 722,000 bpd of crude oil in October.
The agreement is nonetheless significant and seen aided by strong growth in oil demand from the United States. However, the upside in crude values is also expected to be limited, given ongoing excesses in global oil supply, with US commercial crude inventory at 488.1 million bbl on November 25, 30.9 million bbl or 6.8% more than the comparable year ago period, data from the EIA shows.
Moreover, US shale oil producers whom have already been reactivating rigs that helped boost domestic production to an 8.699 million bpd 5-1/2 month high during the Thanksgiving Day holiday week and 271,000 bpd above a 26-month low plumbed in the final days of the second quarter, are seen as benefactors of OPEC’s cut. Many more wells are seen economical with WTI at $55 to $60 bbl that would add oil to the market and slow the draw down in bloated inventory.
Gasoline economics are healthy in the United States amid ample crude supply and strong demand both domestically and for exports. Statistics from the EIA for September, the most recent monthly data available, shows U.S. refinery and blender net production of finished gasoline was 10.3 million bpd in September, 303,000 bpd above a year ago.
“Refinery output remains strong even in the late fall; the first two weeks of November had a net output of 10.5 million b/d and 10.2 million b/d, respectively, compared with output of 9.7 million b/d and 9.6 million b/d for the same weeks last year,” said EIA in a weekly report November 30.
After nearly 11 months, gasoline supplied to the primary market has averaged 9.394 million bpd, 250,000 bpd or 2.7% above the corresponding period in 2015. EIA shows gasoline exports averaged 564,000 bpd in September, up 208,000 bpd from September 2015, with 60% of the country’s gasoline exports that month sent to Mexico.
Another dynamic in a busy November for the oil market was an increase in the required amount of renewables in the transportation sector from a May proposal. On November 23, the Environmental Protection Agency finalized the 2017 Renewable Volume Obligation for the nested renewable fuel category which is overwhelmingly satisfied by conventional corn-based ethanol at the 15 billion gallon statutory level, 200 million gallons more than proposed in May.
Tradable D6 Renewable Identification Numbers, credits obligated parties under the Renewable Fuel Standard–refiners, importers and blenders–submit to the EPA to show compliance again spiked above $1, surging nearly 30cts or 38% from a mid-November low to $1.07 on December 1.
The blend wall, which refers to the 10% maximum ethanol content level in gasoline that can be used in all vehicles on US roads, remains an impediment in adding more ethanol to the gasoline pool even as the mandate to do so expands, spiking RIN values.
In a November 28 blog from consulting engineers Turner, Mason & Company, they project ethanol in the gasoline pool at 14.771 million gallon or 10.18% in 2016 compared to 13.59 million gallons or 10.16% in 2012.
“The percentage of ethanol in the gasoline pool has stayed remarkably constant over the past five years. The general conclusion is that the blend wall is still a limitation and demand for E15 and E85 has not grown significantly,” explain the consultants.