The U.S. gasoline futures contract dropped to a fresh low for 2014 mid-September that coincided with the shift away from summer specification gasoline to easier to manufacture fuel while the national average price for retail gasoline sunk to a seven-month low.
The national average is down 5.1cts in the two weeks since Labor Day, with expectations for another 20cts or greater decline over the next several weeks.
The downtrend is following the seasonal tendency for gasoline prices to decline alongside lower demand after the summer months and transition to higher Reid Vapor Pressure specification gasoline as long as the Gulf Coast and Atlantic Basin don’t encounter supply disruptions from a hurricane or two. The current hurricane season, which runs from June 1 through Nov. 30 has been light on storm activity, with an early July hurricane that skirted north along the East Coast cutting into gasoline demand as opposed to disrupting offshore oil production.
U.S. retail regular grade gasoline, all formulations, averaged $3.408 gallon on Sept. 15, according to the Energy Information Administration, the lowest the average has been since mid-February. The national average has declined every week since June 30 but one, edging up 0.5cts during the week ended Labor Day. The average was $3.704 gallon June 30, the second highest it’s been this year, with the 2014 high registered Apr. 28 at $3.713 gallon.
In its most recent Short-term Energy Outlook, the EIA cut is price expectation for retail gasoline, citing a lower outlook for global oil demand amid a weaker view for world economic growth while supply is seen building at a quicker rate than previously thought. The latest monthly outlook projects a national average for this year at $3.46 gallon, down 5cts from 2013 and 17cts from 2012’s average. The lower trend is expected to continue into 2015 with a $3.41 gallon average, with EIA projecting the average in December at $3.18 gallon.
The nearest delivered gasoline (Reformulated Blendstock for Oxygenate Blending) futures contract that trades on the New York Mercantile Exchange traded at $2.4950 gallon Sept. 15, arguably creating what is known as a double bottom by chart technicians. It is the lowest trade by nearby RBOB futures for more than 10 months, with the contract finding support at the $2.4945 gallon 2013 low registered Nov. 7.
Markets are rarely on autopilot, and the drop to a $2.4950 gallon low by NYMEX RBOB futures so quickly following the summer triggered a quick rebound, with the contract up more than a nickel Sept. 19, climbing to a two-week high above $2.60 gallon. The futures contract should add to those gains in the near-term aided by supply concerns in northern Africa and an oversold market.
A bearish sentiment in September dropped the net-long position by speculators to a four-year low, which should spark additional short covering gains. Noncommercial market participants, which are called speculators since they are not using a futures contract to hedge a position in the physical market, cut their net-long position by 13.4% during the week-ended Sept. 16 to 35,048 contracts—the lowest it’s been since September 2010.
A long position is taken when expectations are for higher prices. In 2014, speculators held their largest net-long position at 90,586 contracts on Apr. 29, the day following this year’s high for the U.S. retail average.
After a very bearish first half of September, a few bullish developments boosted global crude prices represented by the Brent price marker. Citing a weaker demand outlook and well-supplied markets, the secretary general for the Organization of the Petroleum Exporting Countries suggested the oil cartel would lower its 30 million bpd production quota in 2015 by 500,000 bpd when it meets next in late November. A strike in Nigeria threatens crude exports while fighting in Libya cut production in the North African nation that was on the rebound after nearly a year of sharp curtailments to output.
We could see a week or more of modest gains for retail gasoline prices in the near term through support from RBOB futures, although this is not a forgone conclusion. Ethanol has sold off sharply in September, with spot prices down more than 60cts gallon since Labor Day on bearish fundamental factors, with ethanol accounting for nearly 10% of the gasoline market.
Spot ethanol prices along the coasts and for the key Chicago market dropped to their lowest value since July 2010 on Sept. 18, coming under heavy selling pressure as supply increased to an 18-month high while production plants ramped up output and demand fell to a 4-1/2 month low. An expected bumper corn crop and widening producer profit margins could incentivize even greater output, although tight storage availability should tamp back production.
Moreover, any upside by gasoline would be capped by still bearish fundamentals. U.S. crude production averaged 8.838 million bpd during the week-ended Sept. 12 per EIA, the highest weekly production rate since March 1986. Oil is also again being stored in tankers moored offshore as supply overtakes demand.