By Brian L. Milne, Energy Editor, Schneider Electric
In the U.S. gasoline market, it’s not unusual for retail prices to slow or even reverse their September decline in October, underpinned by seasonal refinery maintenance which reduces output that, in turn, pressures crude prices. As the U.S. remains in political gridlock, unable to reach deals on reopening the government while risking a default on US debt and potential downgrade of the country’s credit rating, an advance in gasoline futures would have seemed unlikely.
That was not the case during the week-ended Oct. 11 despite a 3.0cts loss by the November New York Mercantile Exchange Reformulated Blendstock for Oxygenate Blending futures contract that day, with the contract advancing 6.05cts for the week after spiking 7.51cts Oct. 10.
Traders and analysts expect the market to be headline driven over the next few weeks, gripped by expectations Republicans and Democrats would reach deals reopening the government and on the country’s borrowing level, which spiked the market Oct. 10, and the letdown after no deal was reached.
The upside in oil markets was also induced by the brief kidnapping of Libya’s prime minister from his hotel room, but was released within hours of his abduction, stirring worry over the reliability of oil supply from the member of the Organization of the Petroleum Exporting Countries. Worker outages late in the third quarter drastically reduced oil exports from the North African nation that, combined with disruptions from Iraq, cut global supplies. Meanwhile, a force majeure was announced for Nigerian oil exports, another member of OPEC, boosting Brent crude prices.
Domestically, the Energy Information Administration reported a 3% drop in the US refinery run rate to 86% during the week-ended Oct. 4, the lowest rate of utilization since the last week of April. US refiners shut units during spring and autumn for seasonal maintenance known as the turnaround season, a reference to extensive, well planned maintenance. The spring and fall are chosen due to lower demand compared with the summer and winter seasons.
NYMEX oil futures were pressured Oct. 11 to some degree by EIA’s announcement it closed early afternoon that day due to a lapse in appropriations, and wouldn’t provide any new updates until after funding was restored. EIA had used “no-year appropriations balances” to maintain activities 11 days into the US partial shutdown. The news prompted long liquidation, as some in the market decided against flying blind on data.
Before shutting the lights, the EIA reported a 5.8 cents drop in its U.S. regular retail price average to $3.367 gallon for the week-ended Oct. 7, a better than eight-month low, while down 48.3 cents on the year.
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EIA also released Oct. 8 its most recent Short-term Energy Outlook revising lower its projected retail gasoline price for this year due to a drop in crude oil prices. EIA projected regular gasoline retail prices, which averaged $3.63 gallon in 2012, would average $3.52 gallon this year, 3cts lower than month-ago estimates. In 2014, retail gasoline is expected to be $3.40 gallon, also down 3cts from September’s estimate.
“After reaching $3.68 per gallon on July 22, 2013, U.S. regular gasoline retail prices fell to $3.43 per gallon on September 30, 2013,” EIA said. “The largest declines in retail gasoline prices before Labor Day were seen along the West Coast, with ample inventories and an absence of refinery outages such as those that occurred during the summer of 2012.”
EIA expects fourth quarter retail regular grade gasoline to average $3.34 gallon, a drop of 10cts from the prior forecast.
Amid the partial government shutdown and very real possibility of the US defaulting on its debt, consumer confidence is down. The University of Michigan’s preliminary Consumer Sentiment index for October was 75.2, down from a 77.5 reading for September, and below the 75.3 reading expected by the market.
A less confident US consumer spends less, becoming more frugal in their discretionary spending. Lower discretionary spending typically reduces gasoline demand as consumers shop less and dine out less. A prolonged shutdown would further dim optimism, while some analysts suggest the potential for a recession due to the crisis manufactured by the political class in Washington. A recession would reduce gasoline demand, among other negative consequences.
From Jan. 1 through Oct. 4, implied gasoline demand has averaged 8.715 million bpd according to the EIA, up 0.6% against the comparable year-ago period, and is 1.8% higher during the four weeks ended Oct. 4.
About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at [email protected].
