Gasoline and the Summer of Uncertainty

By Brian Milne

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

The Energy Information Administration recently declared that the annual high for U.S. retail gasoline prices was in, with the national average for all formulations of regular grade topping the attention grabbing $3 gallon barrier on Memorial Day at $3.039.

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The analysis aligns with this columnist’s opinion a month earlier that the gasoline futures market, which trades on the New York Mercantile Exchange, peaked in 2018 on May 22 at $2.2855 gallon.

There’s sound reasoning in these views, supported by the required switch in fuel specifications to the year’s lowest Reid vapor pressure ratings that are more expensive to manufacture, the spring refinery maintenance season that reduces run rates and product yield, and increased driving demand during the summer months. And then there’s speculation. The seasonal features for gasoline are well known, and speculators pile in on the trade, outrunning the fundamentals that frequently lead to an annual high just ahead of summer.

Data from the Commodity Futures Trading Commission supports this finding, with noncommercial traders, also known as speculators, reaching a record high net-long position in NYMEX reformulated blendstock for oxygenate blending futures on May 22 at more than 105,000 contracts. This coincided with record high open interest in the RBOB contract at just over 500,000.

By early June, RBOB futures were sliding in value as gasoline inventory was building. EIA data shows U.S. gasoline stockpiles fell to a 232 million bbl six-month low on May 11, and steadily increased over the next several weeks until reaching a 241.2 million bbl 14-week high on June 22. The supply gains coincide with a record rate of U.S. gasoline production which is outpacing record demand that can be observed through days of forward cover, which abruptly jumped the five-year average in late May. These data points further support the projection that the year’s highest gasoline prices, whether in the futures market or at the pump, were reached in May.

Domestic crude oil production reached a record high at 10.9 million bpd in June that is benefiting U.S. refiners through the abundant feedstock, as well as with a lower procurement cost since the U.S. crude benchmark—West Texas Intermediate, trades at a discount to the international crude price best reflected by Brent crude. This is yet another example of why gasoline prices should remain below the May highs.

However, a series of global supply disruptions spanning four continents could upend the outlook, with crude costs again on the rise, pulling gasoline prices higher.

Leading oil producers that include Saudi Arabia and Russia are ramping up output following the late June meetings by the Organization of the Petroleum Exporting Countries and the 10 country non-OPEC contingent led by Russia regarding their two-year supply agreements that run through year end. Those increases, with Saudi Arabia readying output at a record high near 11 million bpd in July, are in response to involuntary production declines by several countries.

Crude production in Venezuela has dropped precipitously, last reported at 1.392 million bpd in May, down more than 550,000 bpd from year prior, and seen sliding below 1.0 million bpd in the coming months, as years of mismanagement and an economic collapse damage the industry. The seizure of Caribbean export terminals by ConocoPhillips after winning a legal case for Venezuela’s nationalization of its assets more than a decade ago is seen hastening Venezuela’s production decline.

A reignited civil war in Libya has dramatically reduced exports from the OPEC country, and the lost exports could endure for months, with rival forces occupying opposing regions of the North African country. Forces loyal to General Khalifa Haftar control eastern Libya, with Haftar creating the National Oil Corp to sell oil from the export facilities he controls. However, only the internationally-recognized National Oil Corporation in Tripoli is permitted to sell oil internationally, with the Benghazi-based entity considered illegitimate. Analysts note this is a significant issue for companies that might shun the new entity out of fear of lawsuits or other retaliation for doing business with a non-recognized company.

Closer to the United States, an upgrader outage near Fort McMurray in Alberta, Canada, has forced a 360,000 bpd shut-in of Syncrude for an estimated six weeks. The June 20 outage is seen lasting through all of July, and has already underpinned a jump in NYMEX WTI futures to a more than 3-1/2 hear high above $75 bbl.

Lastly, reimposed U.S. sanctions on Iran set to take effect November 4 could sharply lift oil prices in the coming weeks. U.S. officials have warned countries that they expect strong compliance with the sanctions, including zeroing out their oil imports from the OPEC member, or expect retaliation from the United States. The stronger than expected demands from the United States are already having an effect, with reports indicating Iranian crude exports dropped from 2.7 million bpd in May to 2.2 million bpd in June.

Unless world oil producers can make up for the lost supply, crude prices will spike, pulling gasoline prices higher even with record high output from U.S. refiners.

Brian Milne is the energy editor with DTN, an independent, trusted source of actionable insights for 600,000 customers focused on feeding, protecting, and fueling the world. Customer-centric and employee-driven, DTN focuses on empowering agriculture, oil and gas, trading, and weather-sensitive industries through continuous, leading-edge innovation. DTN is based in Minneapolis