By Brian Milne
Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Following the peak gasoline demand season in the U.S., which occurs during the summer months, wholesale gasoline prices dropped about 20 cents per gallon in early September from late August, but have since clawed their way higher, led by crude gains as a second round of sanctions on Iran are ready to take effect in early November.
Three days after Labor Day, the celebrated end of peak driving demand, gasoline futures on the New York Mercantile Exchange fell to a $1.9260 gallon 5-1/2 month low on the spot continuous chart, fully repealing the summer price advance. Gasoline futures on NYMEX trade under the RBOB acronym, or reformulated blendstock for oxygenate blending, reflecting the fuel specification for New York City, with the contract delivery location at fuel terminals in the New York Harbor.
U.S. gasoline demand this year has outpaced the 2017 demand rate through mid-September, slowing year-on-year in early August before again gaining on the 2017 pace later in the month, with data from the Energy Information Administration showing implied demand at an all-time weekly high during the week-ended Aug. 24 at 9.899 million bpd. Cumulatively through Sept. 14, gasoline supplied to the primary wholesale market in 2018 has averaged 9.399 million bpd, up 121,000 bpd or 1.3% against the comparable year-ago pace.
Further boosting demand for U.S. gasoline are foreign buyers, with U.S. exports up 9.1% in 2018 through mid-September compared with 2017, averaging 719,270 bpd. Nonetheless, gasoline stocks this year have consistently held above the year-ago level since the end of June, and above the five-year average every week except for a week in late January.
Oil refiners operate their facilities at the highest utilization rate during the summer months to satisfy the strong demand pull for gasoline, which is fulfilled from a combination of new production, imports and drawdowns from inventory. Gasoline stocks fell to a summer weekly low in late July at 231 million bbl, but in the following weeks chopped higher, totaling 234.2 million bbl on Sept. 14.
When viewed through days of forward supply, a calculation that considers the number of days current inventory would satisfy demand, the 2018 trend line looks far less bearish. When gasoline supply fell to its summer low in late July, days of forward supply slipped to a 23.9 day eight-month low.
Going forward, the gulf between year-ago stock levels and current year will widen that should weigh on wholesale gasoline prices. This is especially true when considering lost gasoline production in September 2017 because of the devastation caused by Hurricane Harvey in the country’s refinery center in Texas and Louisiana. The U.S. refinery run rate plunged below 80% of capacity during the first half of September, and held below the five-year average through early October.
Seasonal refinery maintenance during autumn prompts lower operating rates and reduces refinery yield, and gasoline stocks draw down. Following the repairs a year ago made necessary by Hurricane Harvey, refinery maintenance in the Gulf Coast will be light this season, although heavy in the Midwest. This year however, run rates are likely to remain above average as refineries process a record level of U.S. crude production. EIA data shows domestic crude production averaging 10.975 million bpd during the four weeks ending Sept. 14, up 1.681 million bpd or 18.1% against the comparable year-ago period.
Despite the risk U.S. refineries could flood the domestic market with gasoline, wholesale values won’t freefall in the coming months as crude costs will dictate pricing. Iranian oil exports have reportedly dropped by 900,000 bpd from April to 1.6 million bpd in September because of U.S. sanctions on Iran’s economy reimposed after the United States pulled out of the Iran nuclear deal known as the Joint Comprehensive Plan of Action.
A second and harsher round of U.S. sanctions that target Iran’s oil exports and banking sector will take effect in early November, and some market followers think Iranian oil exports could sink another 500,000 bpd. The lost supply is compounded by an economic collapse in Venezuela, where crude production has dropped consistently for months to reach the lowest level in decades. Venezuelan oil production, which averaged 1.235 million bpd in August, could drop another 250,000 bpd by year’s end.
Brent crude, the international price marker, is trading just below $80 bbl and West Texas Intermediate, the U.S. benchmark, moved above $70 bbl in mid-September, with both contracts on an upward trajectory into the fourth quarter. Further price upside is not guaranteed, but the path of least resistance at this point in time is higher.
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.