Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
The New York Mercantile Exchange September gasoline futures continues summer grade fuel specifications, yet as far as pricing dynamics go, the switch away from the peak demand season has started with the expiration of the August contract on July 31.
Gasoline demand remains strong in August, underpinning strength in cash differentials in spot trading for physical supply, yet on the paper side, market participants are already factoring in the coming switch to less expensive to produce winter grade product and September’s decline in gasoline consumption compared with August.
Of course, the same argument was made a year ago. In fact, the market looked even more bearish as gasoline supply was elevated, having reached a record high earlier in the year. The September RBOB (reformulated blendstock for oxygenate blending) futures contract would spike at its end-of-August expiration as Hurricane Harvey ravished oil refineries in the Texas-Louisiana U.S. refining center, shutting refineries, terminals and pipelines. The effects of the destructive hurricane would press gasoline supply below the five-year average, underpinning support for gasoline prices.
RBOB futures remain in backwardation through January, a bullish market structure in which the gasoline contract closest to delivery trades at a premium to deferred contracts. Yet, we’re beginning to see the premium in the calendar spreads decline.
Despite the noted seasonal transition and the potential for a hurricane to upend any forecast, upside price risk remains through crude costs. Market sentiment is shifting almost daily between bullish and bearish, reflecting extraordinary uncertainty amid a host of geopolitical issues. Here lies the wild card confounding forecasters.
Seasonally, crude costs should decline as we move into September and refinery turnarounds begin to reduce refiner oil demand. U.S. refiner demand for crude continues near record highs, while nearly 250,000 bpd or 1.5% above year ago cumulatively in 2018 through July 27 at 16.9 million bpd, data from the Energy Information Administration shows.
Gasoline fundamentals remain strong, with preliminary demand data from the EIA showing demand up 146,000 bpd or 1.6% in 2018 through late July against the comparable year-ago period. Growth in U.S. gasoline exports have boosted implied demand, up more than 50,000 bpd or 7.6% this year through July 27, averaging 733,600 bpd.
Gasoline inventory at a seven month low of 231 million bbl as of July 27 is still 1.4% more than at the same time in 2017. However, forward supply has fallen to an eight-month low at 23.9 days, slipping below the five-year average for the first time since late May.
China has said it would stop importing U.S. gasoline in response to tariff threats from the United States as the world’s two largest economies escalate their trade war. Yet, tightness in global supply is likely to mute the trade action.
Domestically, the U.S. economy remains strong, with the national unemployment rate at a nearly two-decade low at 3.9% in July while job growth remains robust. The Bureau of Labor Statistics reported Aug. 3 that job growth averaged just short of 225,000 during the May-June-July period. The Federal Reserve on Aug. 1 at the conclusion of their two-day meeting highlighted the strength and durability of the U.S. economy, which bodes well for gasoline demand in the coming months.
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, with offices globally.