Just under $2.50 gallon is where the U.S. gasoline futures market found support during the second week of September amid a massive selloff in domestic and global crude oil prices, with lower trending oil battered by bearish readings for forward oil demand by the three major forecasters.
Oil prices were already trekking down on growing global oil supply even as Saudi Arabia cut output by 400,000 bpd in August from 10 million bpd, with crude production in the U.S. setting a fresh 28-year high last month at 8.6 million bpd per data from the Energy Information Administration.
Ahead of the selloff, markets were skittish on an uneven global economic recovery, with the European Central Bank earlier this month announcing extraordinary monetary policy to goose stubbornly low inflation and stave off dreaded deflation, and China’s economy slowed down over the summer. China, the world’s second largest economy and consumer of oil, is projected to be the largest driver of annual oil demand growth. A slowing economy would dent those expectations.
The U.S. economy, a pillar of strength in comparison, was dinged by surprisingly weak jobs growth in August, but retail sales and strong consumer confidence quickly countered the bearishness, with economists in a recent Wall Street Journal poll mostly firming strong views for the economy.
Monthly reports from the EIA, Organization of the Petroleum Exporting Countries and the International Energy Agency released Sept. 9, 10 and 11, respectively, downgraded their expectations for global oil demand growth for both this year and 2015 from their outlooks in August, sparking sharp selloffs for the oil markets. In reconciling second quarter global oil demand with expectations, the forecasters found it was down even more than preliminary data parsed over the summer suggested, with IEA calling the shortfall a “pronounced slowdown in demand growth,” prompting the downgrades.
Brent crude oil, the international price marker for oil and price point that US oil products pivot off, sunk below $100 bbl for the first time in more than a year into the mid $90s bbl, while West Texas Intermediate traded at $90.43 on the New York Mercantile Exchange, the lowest the nearest delivered contract has traded since May 2013.
New sanctions on Russia imposed by the European Union and U.S. Sept. 12 for destabilizing Ukraine, and the concern Moscow would retaliate, slowed the selloff. The futures contracts had also fallen to key support price points that arrested the decline.
Gasoline prices were already under pressure from the end of the summer’s peak driving season on Labor Day, and the transition happening now to easier to manufacture gasoline with higher Reid vapor pressure ratings. RVPs measure the emission release from gasoline, which increases with higher ambient temperatures, so are more stringent during the summer. The easier to produce gasoline specification lowers the processing cost for refiners
Weekly data from the EIA released Sept. 10 fanned the bearishness for gasoline, showing gasoline supplied to the primary market tumbling 869,000 bpd or 9.2% from the week leading up to Labor Day to the week-ended Sept. 5. It was the lowest weekly implied demand rate since mid-April, while sinking from the highest rate since July 2010.
As we discussed in our Sept. 8 blog, a sharp decline from the high isn’t a surprise, although the magnitude of the decline was far greater than imagined, and fed into the bearish sentiment enveloping the market. We should see implied demand move higher from the nearly four-month low in EIA’s next report since the holiday likely obscured the data. Suppliers will move product closer to retail outlets during holiday periods to ensure supply is available for consumers, which usually leads to less product needed during the week that follows. The holiday would have also cut into supply movements from refiners.
The rapid selloff observed so far in September should slow, with seasonal turnarounds already underway at a handful or refineries. This should limit restocking and the decline in price. Nonetheless, retail gasoline prices are pointed down, and we are likely to see the national average, which stood at $3.457 gallon on Sept. 8, drop 25cts or more over the next 6-8 weeks.