By Brian Milne,
Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Building supply and slowing demand triggered a string of losses for the gasoline futures contract traded on the New York Mercantile Exchange, including the last six sessions through May 2, strongly arguing that the preseason rally ahead of peak summer driving demand has come to an abrupt end.
Reformulated Blendstock for Oxygenate Blending futures ended lower in 15 days of the first 21 trading sessions of the second quarter, with the June contract closing the seasonal gap on the spot continuous chart in its debut as nearest delivery with a $1.5075 gallon better than two month low. It was a big fall for RBOB futures, which had rallied to a $1.7710 gallon 20-month high on the spot chart on April 12.
During the first quarter, gasoline supplied to market had trailed the record setting pace of 2016, which wasn’t too much of a surprise considering retail gasoline prices had fallen to a seven-year low in February 2016 coinciding with a break below $30 bbl by NYMEX West Texas Intermediate crude futures to a $26.05 13-1/2 year low. In demonstrating the elasticity of gasoline demand in the United States, consumption surged.
Fast forward to 2017, and WTI futures were trading over $50 bbl spurred higher by production cuts by the Organization of the Petroleum Exporting Countries with support from pledged output reductions by 11 non-OPEC oil producing countries. At nearly 1.8 million bpd, the production cuts for a six-month term through June 30 were seen drawing down a mountain of oversupply, with the global glut now in its third year.
RBOB futures were provided additional support in March and early April as weekly implied gasoline demand was catching up with the year-ago pace and inventory was being drawn down consistently from mid-February through early April. Nearly 20 million bbl of inventory was brought to market. These data points are best reflected in days of forward supply, which slipped below the five-year average at 25.4 days.
The improving demand coincided with bullish consumer confidence, with the University of Michigan Consumer Sentiment Index holding near January’s 17-year high. A confident consumer is typically willing to spend and drive more, which joined expectations for robust economic growth in the coming months.
The oil market was also lent support from strong compliance of more than 90% by OPEC in meeting their pledged production cuts, which defies their history of cheating on quotas. In the background however was rapidly climbing crude production in the United States, with US drillers boosting domestic output to more than 500,000 bpd in late April since OPEC reached their agreement on November 30, 2016.
Climbing US oil production is frustrating OPEC’s efforts, capping the upside for global oil prices. There was much skepticism that OPEC would realize its goal in reducing global oil inventories to their five-year average, with talk of an extension to the end of 2017 now seen necessary to hold oil prices over $50 bbl. OPEC meets May 25 in Vienna to discuss the issue.
As gasoline demand slowed and supply began to accumulate, selling erupted, with the bearish gasoline data pressuring both WTI and RBOB futures. Noncommercial traders, also known as speculators liquidated long positions in RBOB futures, with a long position taken on expectations prices would move higher. From April 3 to April 24, the Commodity Futures Trading Commission shows noncommercial market participants liquidated 7.4% of their length. Expect that pace to have accelerated when the CFTC releases its latest data through May 2 in its Commitment of Traders’ report on May 5.
To learn more about Schneider Electric’s Oil & Gas offerings for the downstream market, click here.