By Brian Milne, Editor, Schneider Electric
Bullish seasonal features are now the driving force in the U.S. gasoline market, and speculators have already positioned for the price advance off February lows, with those lows likely to endure for several weeks. Considering the calendar, the lows plumbed in February might very well persist through 2016 and the futures contract might have established a long-term low on the spot continuous chart at $0.8975 per gallon.
March RBOB futures on the New York Mercantile Exchange expired at a $0.2985 per gallon discount to April delivery, with the April contract gapping higher on the spot continuous chart on the first day of March and settling at $1.3035 per gallon. The massive contango between March and April delivery that reached $0.3053 per gallon on Feb. 26—the widest spread between first and second month delivery in 10 years, reflects the transition to lower Reid vapor pressure gasoline and expectations for greater driving demand as the weather warms.
The steep discount by the now expired March contract also accentuates the still prevailing bearish fundamentals that have converged with the well-known trend for gasoline prices to move higher from winter to spring. In their Feb. 26 Commitment of Traders report, the Commodity Futures Trading Commission showed noncommercial market participants or speculators expanded a net-long stance—a position taken on expectations for prices to increase from current levels—to a 22-month high during the week-ending Feb. 23. The bullish stance came with record open interest which shows greater commitment by the market, with open interest for the RBOB contract increasing every week in 2016.
The gasoline market is not immune to the bearish fundamentals of crude oil, with the global market still captured by massive oversupply that is expected to continue building through much of the year, although at a slower pace during the second half of 2016. A market rebalancing is not expected until 2017.
West Texas Intermediate (WTI), the U.S. benchmark for crude oil, edged higher at the front end of the forward curve through February in futures trading on NYMEX, and began March in a technical short-term uptrend with the monthly chart showing the long-term trend has turned up. WTI could again find itself under heavy selling pressure in April when seasonal turnarounds at U.S. refineries dampen demand for crude oil that would also weigh on gasoline values.
U.S. commercial crude oil inventory is over 500 million barrels, the most since 1930, and storage space has tightened globally. Gasoline inventory is high too, 6.9% above a year ago in mid-February and 11.1% more than the five-year average, data from the Energy Information Administration (EIA) shows.
Low retail prices are again seen billowing demand, with year-on-year growth in U.S. gasoline demand in 2015 at 236,250 barrels per day or 2.7%—the largest annual increase in domestic gasoline demand since 2002, monthly data released late February by the EIA shows.
Preliminary data for 2016 from the EIA shows strong demand continued during the first several weeks of the year, up 222,000 barrels per day or 2.5% versus the comparable timeframe in 2015. During the week-ended Feb. 19, gasoline supplied to the primary wholesale market spiked to a 9.576 million barrels per day six-month high, placing the weekly demand rate at summertime highs.
EIA’s national average for regular grade gasoline sold at retail outlets moved higher during the last couple of weeks in February after seven consecutive weeks with a decline, ending the month at $1.783 per gallon. On Feb. 15, it fell to a $1.724 per gallon seven-year low. Although retail gasoline prices are poised to snap higher, they will remain heavily discounted against pump prices for most of the past decade.
A low gasoline price in and of itself will boost demand, although vehicle efficiency improvements will cap the upside, with EIA projecting a conservative 70,000 barrels per day boost in annual demand this year to 9.23 million barrels per day and no growth in 2017. If realized, that would be a near match with record U.S. gasoline demand achieved in 2007 at 9.286 million barrels per day, which edged out the 2006 demand rate of 9.253 million barrels per day.