Refining units returning from seasonal maintenance, notably along the heavy concentration of processing capacity along the U.S. Gulf Coast, during the first week of November sparked another leg down in the gasoline futures contract traded on the New York Mercantile Exchange that broke below psychological support at $2 gallon for the first time in nearly 50 months—1,504 days to be precise.
The run rate, which refers to the amount of capacity being utilized, topped 90%, 90.1%, for the first time since mid-September, with utilization at 92.3% for the Gulf Coast. The higher run rate will lead to a greater supply of gasoline even as refiners look to hike the output of distillate fuels—diesel and heating oil, which increased for two straight weeks to a six-week high.
Coinciding with higher refinery utilization, gasoline supply registered a weekly build during the first week of November following four weekly drawdowns that dropped U.S. inventory to a near two-year low. Gasoline supply should rebuild for the remainder of 2014.
On Nov. 14, the front-month Reformulated Blendstock for Oxygenate Blending futures contract on NYMEX traded at $1.9909 gallon—the lowest trade on the spot continuation chart since late September 2010. The contract rallied off the new low, settling up 4.09cts at $2.0425 gallon, although ended the week down more than 9cts.
The weekly loss for RBOB futures, which is indexed against in physically traded wholesale markets, will gradually filter through the supply chain to pressure retail prices. The Energy Information Administration last reported its U.S. average for all formulations of regular grade gasoline declined more than a nickel in early November to $2.941 gallon—the lowest the average has been since November 2010.
The selloff in oil futures since September, with U.S. and global crude sliding into bear markets in October, has been brisk, upending several forecasts. The EIA on Nov. 12 released their monthly Short-term Energy Outlook, and revised price projections steeply lower, dropping its 2015 forecast for Brent crude oil $18 from its October estimate to $83 bbl. For US retail gasoline, the EIA expects a $3.39 gallon average this year before sliding to $2.94 gallon in 2015—a 44cts or 13% downside adjustment from October’s outlook.
Previously, this column had called for a bottom in the average right around the Veterans’ Day holiday. It looks like we have a little more downside to go, but there are indications the slide will soon come to an end.
The Nov. 14 rally by NYMEX RBOB futures from the new low was on short covering—buying back previously sold contracts, and bargain hunting triggered by separate reports showing bullish U.S. retail sales in October, up 0.5%, and a surge in consumer confidence to a seven-year high. Analysts suggest lower gasoline prices boosted consumer confidence since less of their paycheck goes to fill the tank.
Lower gasoline prices also underpin higher demand, which topped 9.0 million bpd for the second consecutive week ending Nov. 7—the first time that has happened since August, and only the fourth time in 2014. EIA data shows implied demand held above the 9.0 million bpd mark for two straight weeks in August and for two successive weeks from the end of July to the first week of August. Before that, you would need to look to May when implied demand ran above the 9.0 million bpd mark for four consecutive weeks—boosting higher demand expectations for the year at the time, while coming in front of the June rally spurred higher by the Ukraine crisis and the surprise advance in Syria and Iraq by the Islamic State.
Another factor that should slow and potentially lend support to higher retail gasoline prices is ethanol. Ethanol spot prices have spiked in November, climbing to a seven-month high even as production surged to a four-month high. Spot ethanol prices at the key market in Chicago rallied 35cts gallon during the second week of November, with ethanol and gasoline trading flat with each other—down from a better-than $1 discount ethanol held to gasoline in September.
The surge in spot ethanol prices is blamed on logistical woes, with traders complaining about a lack of railcars to move product to markets along the coasts. This has left many regional markets short supply and uncertain how long the logistical issues would persist, triggering the rally in ethanol prices.
Ethanol’s market share hovers near 10% of the gasoline pool, so a 10cts gain in ethanol prices should theoretically add a penny to a gallon of gasoline. Add that factor with the prospect gasoline demand would remain healthy, especially as we near Thanksgiving Day, and we should see the slide in retail gasoline prices end as holiday travel kicks in.