By Brian Milne, energy editor for Schneider Electric.
In the futures market for U.S. oil products, the gasoline contract has taken a backseat to Ultra-low Sulfur Diesel futures, with the ULSD contract used in hedging winter fuels, among other benchmarking uses.
The transition away from interest in gasoline during its peak consumption season comes as demand for gasoline wanes and supplies build.
New York Mercantile Exchange Reformulated Blendstock for Oxygenate Blending futures with nearest delivery slumped to a fresh nearly four-month low at $2.8274 gallon July 24 before rebounding from the low with support from a rally in world oil prices on heightening geopolitical conflicts. The move to a fresh low also comes a week ahead of the expiration of the August contract, with a number of spot wholesale markets already transitioning to indexing against the September contract, a month when gasoline demand consistently declines from August.
Where did the summer go?
Implied gasoline demand, which refers to product supplied to the primary market, was robust from early March through Memorial Day, mostly holding over the five-year average. Demand in June was choppy, and then just dropped like a rock in July.
During the four weeks ended July 18, implied gasoline demand was down 78,000 bpd or 1% versus the comparable year-ago period, just a whisker below nine million bpd, according to the Energy Information Administration. For the week-ended July 18, the most recent data available, implied demand tumbled 264,000 bpd to 8.792 million bpd while down 190,000 bpd or 2.1% against the same week in 2013.
The decline is difficult to link to retail prices, with the EIA’s national average for regular grade sliding to a $3.593 gallon four-month low, with more downside working through the supply chain. In June, the U.S. average peaked at $3.704 gallon, boosted by higher wholesale prices amid high anxiety over possible supply disruptions in Iraq amid a new insurgency. The worry has been reduced sharply after the NYMEX RBOB contract spiked June 23 to $3.152 gallon, since tumbling 32.46cts or 10% from the high to the July 24 low. The U.S. retail average is down 11.1cts or 3% from its high in June, although retail prices did not absorb the full thrust of the futures spike in June.
Accelerating the exodus in NYMEX RBOB futures holdings, with net-length held by speculators again slipping during the week-ended July 22, is building supply as refineries spit out an increasing amount of product. EIA showed a sharp 3.4 million bbl increase in gasoline stocks for the week-ended July 18 to 217.9 million bbl, with supply now the highest since mid-March. Meantime, the refinery run rate has held at 93.8% of capacity for two weeks straight through July 18, the highest utilization rate since June 2006, according to EIA data.
Speculators further trimmed their net long holdings in NYMEX RBOB futures during the week-ended July 22 after unloading 30% of their length the previous week according to the most recent data from the Commodity Futures Trading Commission. As of July 22, speculators held their smallest net-long position since early February, with a long position taken on the belief prices would move higher from current values.
In the coming few weeks we should see the NYMEX RBOB contract consolidate at the low end of its recent trading range, with technical support near $2.82 gallon holding. Refineries are seen trimming output in the coming weeks including earlier than usual seasonal maintenance. That would slow the buildup in gasoline supply. Demand should rebound, too, while the world’s many hotspots could underpin further gains in global oil prices. Failing these expectations, the RBOB contract could drop to next support below $2.75 gallon.
