The gasoline futures contract nearest to physical delivery traded in a more than 25cts gallon range in September with little less than two days of trade for the month remaining, which included sharp daily reversals in what is known as whipsaw price action late in the month ahead of an expiration deadline.
Seasonal features for gasoline argue prices should decline this time of year, however New York Mercantile Exchange RBOB (reformulated blendstock for oxygenate blending) futures with nearest delivery rallied 14.31cts during the two-week period ended Sept. 26. Much of the upside thrust was triggered by technical features, namely too much selling earlier in the month. Refinery outages, both planned and unplanned, exacerbated the price volatility.
NYMEX October RBOB futures spiked to a $2.7577 one-month high Sept. 25 in a short squeeze, closing the seasonal rollover gap on the spot continuation chart. Consider the nearby RBOB contract dropped to a $2.4950 11-month low on Sept. 15.
U.S. gasoline demand always declines in September from August, and prices usually move lower with the drop in consumption. The seasonal transition away from peak demand coincides with the move to a higher Reid vapor pressure specified gasoline, which is less costly for refiners to produce. Atop of these known features, the global and domestic oil markets encountered steep selling as a bearish sentiment overtook market participants like a rolling fog over a pond early morning.
The bearishness is well grounded as growth in global crude production, namely the expansion of output in the U.S. weigh on asking prices. Libya production continues to grow after nearly a year of depressed output, reaching more than 925,000 bpd late September according to reports from less than 300,000 bpd late spring. Add to that higher output from Iraq despite control of northern parts of the country by Islamic State militants. Oil production in the North Sea also increased following rig maintenance offshore the northern European coast.
Against this growing supply, demand looks weaker than previously projected. This is due in large part to slowing growth by China’s economy, although the country’s economic expansion continues above a 7% annualized rate. The U.S. economy is the bright star, with the Bureau of Economic Analysis on Sept. 26 revising higher its reading on second quarter growth to 4.6%—the highest annualized growth rate since the fourth quarter 2011. Consumer confidence also surged to a 14-month high.
NYMEX RBOB futures positions held by speculators, which are followed because these traders can move in-and-out of trades quickly since they are not hedging an underlying physical position thereby providing a guide to market sentiment, moved to their lowest net-long position in four years during the week-ended Sept. 16. A long position is established when the expectation is for prices to move higher.
The market got too short however. Talk of supply tightness, albeit it relatively isolated and likely brief, amid the transition to higher RVP gasoline strengthened cash differentials in some markets. Refinery outages, notably in the Gulf Coast and eastern Canada which send supply to the Northeast, sparked aggressive buying ahead of the options expiration on Sept. 25 for the NYMEX October RBOB futures contract. The outages combined with the short market stance and expiration deadline triggered the short squeeze, spiking the October RBOB futures contract.
The October RBOB contract expires at the end of trading Sept. 30, with the November contract then rolling into the nearest delivery position which is what spot gasoline prices index against for most of the month. The November contract settled the Sept. 26 session at a 17.38cts gallon discount to October.
If there remains a sizeable number of short-positioned market participants that still need to cover, we could see more fireworks in closing out September and the third quarter. The steeply discounted November contract suggests the current detour away from lower trending prices will be brief.
Remain guarded, however, in being lulled into a bearish complacency. Global risks abound, and the world uses the most oil during the fourth quarter. So one might note just as the market bloodied a number of participants in late September, following the herd could be a costly and unnecessary risk.