Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
By Brian Milne, Editor, Schneider Electric
Preliminary data indicates gasoline demand in the U.S. reached a record weekly high in June, and travel demand over the Independence Day holiday weekend is expected to climb to an all-time peak, as historically low retail gasoline prices for early summer stimulate road travel.
After six straight weeks with an increase, U.S. retail gasoline prices declined during the week ended June 27, with the regular grade average at $2.329 gallon and all grades at a $2.432 gallon average the lowest for the summer driving season since 2005, based on data from the Energy Information Administration.
The decline in retail prices came four weeks after the gasoline futures contract on the New York Mercantile Exchange registered a seasonal peak at $1.6664 gallon, with spot wholesale prices in bulk trading in the physical market indexing off the futures contract. Nearest delivered RBOB futures, the acronym for reformulated blendstock for oxygenate blending, stumbled 7% in June to $1.5014 gallon, trading in a $1.4589 by $1.6452 gallon range during the month.
The selloff in June might strike some as odd, considering U.S. implied demand has been strong, registering a record high weekly rate of 9.815 million barrels per day in mid-June, while up 3.9% in 2016 through June 24 against the comparable year-ago period, according to EIA data. The decline into the July RBOB futures expiration was also booked as the travel group AAA forecast a 1.2% increase in road travel for the Independence Day holiday weekend from year prior to a 36 million person record high.
“We are well on our way for 2016 to be a record-breaking year for summertime travel,” said Marshall Doney, AAA president and CEO. “This trend is welcome news for the travel industry and a sign that Americans are taking to our nation’s highways and skies like never before.”
Economic indicators in the U.S. also suggest strong driving demand would endure, with consumer spending trending higher in the second quarter, home values appreciating and the pace of home sales increasing. These data points imply consumers remain the pillar of strength driving U.S. economic growth, and follow an upward revision in first quarter U.S. gross domestic product. The Bureau of Economic Analysis revised U.S. first quarter economic growth 0.3% higher for a second time in late June, from an initially reported 0.5% annualized growth rate to 1.1%.
Yet, U.S. gasoline inventory remains stubbornly high, with weekly supply drawdowns in the second quarter followed by stock builds amid strong domestic refinery output and imports. On June 24, EIA data shows gasoline supply at 239 million barrels–10.3% more than year prior and 11.8% above the five-year average.
The high inventory level also illustrates the global supply glut in crude and oil products, with competition among exporters fierce. U.S. gasoline imports averaged 836,000 barrels per day during the four weeks ended June 24, 11.3% more than during the comparable year-ago period and 14.2% above the five-year average.
The market structure for NYMEX RBOB futures continues to reflect the price pressure from high inventory, with the August contract moving down to achieve parity with the now expired July contract, and the backwardation in calendar spreads through year end continued to weaken. NYMEX Ultra-low Sulfur Diesel futures even moved to a slight premium to RBOB futures a day prior to their July contract expirations for the first time since February, albeit briefly, with the ULSD contract used as the benchmark for heating oil as well as diesel and jet fuels in spot wholesale trading.
Gasoline prices typically slip in June from highs marked during the run-up to the Memorial Day weekend, and can bounce back in July and August if demand remains strong. Indeed, noncommercial market participants added to a net-long position in NYMEX RBOB futures during the week ended June 20 for the first time since early March when they reached a 95,626-contract net-long four-year high, data from the Commodity Futures Trading Commission shows.
A long position is taken on expectations prices would move higher, with the noncommercial group, also called speculators since they are not acquiring a futures contract to hedge an underlying position in the physical market, adding to their long stance when futures hit the June trough. The boost in speculator’s net-long position in mid-June also followed incessant long liquidation by speculators that dropped their net-long stance 45% from their March high.
June was an extremely volatile month for equities and commodities heightened by Britain’s decision to leave the European Union. The unexpected outcome has upended forecasts for economic growth and demand for oil globally, with some analysts now suggesting recession in Britain and the European Union is not far off.
The Brexit vote has also stayed the hand of the U.S. Federal Reserve analysts say, with the central bank not expected to raise interest rates at all in 2016 compared with Fed optimism in December when they boosted the federal funds rate from near zero to 0.25% that there would be between two and four rate hikes this year.
While the paltry return on the U.S. dollar should weaken the greenback compared with currencies around the globe, other economies are in worse shape than the U.S., and central banks worldwide have gone whole hog on quantitative easing efforts to stimulate economic growth, including negative interest rates, amid a scarcity of policy leadership by elected officials.
In this environment, the dollar is seen strengthening, with domestic crude prices having an inverse relationship with the greenback. Lower crude prices would hold down gasoline prices and continue to spur driving demand, although demand for the other half of the barrel is likely to remain under pressure from limited economic growth.