Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
By Brian Milne
Gasoline futures closest to physical delivery ended November at a two-week low following disappointing demand over the Thanksgiving Day holiday while a closely watched and much anticipated meeting by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries including Russia failed to excite the market.
December gasoline futures, known as reformulated blendstock for oxygenate blending or RBOB that trades on the New York Mercantile Exchange, ended a nickel lower on the month at $1.7284 gallon, and more than a dime down from a November high of $1.8402 gallon. Pressure from building supply as demand plunged to a nine-month weekly low sparked selling in gasoline futures.
Expectations for travel over the busy Thanksgiving Day holiday were bullish, with the travel agency AAA forecasting 50.9 million Americans would travel 50 miles or more from their home. Driving demand was strong along the East Coast and in the Midwest, but not as robust elsewhere in the United States.
The Energy Information Administration reported gasoline supplied to the primary market for the week-ended Nov. 24 at 8.724 million bpd, tumbling 871,000 bpd from the prior week to the lowest weekly implied demand rate since late February. The weekly report didn’t include all of the Thanksgiving holiday weekend, but was enough to spark a selloff when published on Nov. 29.
“The market was led lower by gasoline because inventories for the fuel increased due to weak demand, which may be due to the fact that people didn’t drive much over the Thanksgiving holiday,” said Andy Lipow, president of Lipow Associates in Houston, following the report’s publication.
Gasoline inventories increased by an unexpected 3.6 million bbl to a 214.1 million bbl five-week high for the week reviewed, EIA reported, which also marked the fourth straight weekly supply build. Domestic gasoline supply is still down 12.0 million bbl or 5.3% from year prior, and on par with the five-year average.
The decline in gasoline futures was moderate overall, however, with implied demand still outpacing year prior during the four weeks ending Nov. 24 at 9.247 million bpd, up 78,000 bpd from the comparable four weeks in 2016. Moreover, it’s not unusual for EIA’s implied demand figure over holidays to decline from the prior week, as wholesalers typically position supply close to retail outlets in anticipation of robust consumption. EIA’s next supply report will likely show a rebound in product supplied to market, maintaining the strong demand pace that began in June.
The late November decline in gasoline futures also follows an overbought market, with speculators moving to a 10-month high net-long position in NYMEX RBOB futures in November, with a long position a bet that prices would move higher over time. The exposure to higher prices included record open interest, which refers to the number of outstanding futures contracts.
Gasoline futures uptrend coincides with climbing crude prices, which have rallied since falling to a 10-month low in June on mounting evidence that a prolonged global supply-demand imbalance was closing the gap amid unexpectedly strong demand and 1.8 million bpd in production cuts by OPEC and 10 non-OPEC oil producing countries that took effect Jan. 1.
Strong compliance by OPEC and their partners in fulfilling terms of the production agreement have lowered a supply overhang by the 35 countries that are part of the Organization for Economic Cooperation and Development from 380 million bbl over their five-year average to 140 million bbl in October, according to OPEC Secretary General Mohammad Barkindo. The United States is a member of OECD, with U.S. crude stocks at 453.7 million bbl as of Nov. 24 down 34.4 million bbl or 7.1% from year prior. Another 50 million bbl of oil held in vessels offshore known as floating storage was also brought to market since June added Barkindo.
While the global oil market is coming into balance, U.S. oil production is growing amid higher oil prices, reaching a 46-year high at 9.682 million bpd during the week of Thanksgiving. Government and private forecasters project output to continue climbing in 2018.
The scenario has backed OPEC into a corner, with the economies of its 14 members highly dependent on oil revenue. Oil futures rallied through the fourth quarter in anticipation OPEC and its non-OPEC partners would extend their production agreement set to expire at the end of the first quarter 2018 for nine months at a Nov. 30 meeting, which they did. However, no other sweetener was offered by the oil producers, leading to flat trade.
Going forward, the market will keep close vigilance on compliance with the agreement, with Russia complaining that the production cuts are hurting their oil industry, while higher oil prices might prompt cheating by other parties to the supply pact. The 24 countries agreed to review market conditions and the effectiveness of the output cuts in June 2018.