Wholesale trading for gasoline in the U.S. was again volatile during the week-ended Feb. 11, with the benchmark futures contract trading in a 12.4 cents range although prices moved up a more modest 3.0 cents during the week. Wholesale gasoline offers at distribution terminals were mixed across the country, higher along the West Coast on a short squeeze in spot trading.
Meanwhile, the Energy Information Administration (EIA) reported that its U.S. weekly retail gasoline price average jumped 3.1 cents to a $3.132 gallon 28-month high on Feb. 7, contrasting with this author’s expectations for the retail average to hold steady or even decline.
As previously noted however, there remain numerous factors—many opposing one another—that impact gasoline’s street price, which go beyond traditional supply-demand fundamental factors. In February, events in Egypt have been an important driving factor.
At first blush, fundamental factors are overwhelmingly bearish for gasoline. Implied demand reported by the EIA, which measures the product movement in the primary wholesale market, slumped to a one-year low during the week-ended Feb. 4, and might still move lower.
It’s normal for gasoline demand to decline this time of year, with EIA reporting the weakest period for demand in 2010 occurring during the week-ended Feb. 12. In addition to this seasonal weakness, persistently high unemployment and retail gasoline prices have historically proved to be strong headwinds limiting gasoline consumption in the U.S.
Meanwhile, in absolute terms, total gasoline supply spiked to a nearly 21-year high, while days of forward cover jumped to 27.9 days. The last time forward supply cover for gasoline was as much as 27.9 days was during the week-ended Feb. 26, 1999.
Wholesale gasoline prices were positioned to move lower amid this pressure, but a raft of unexpected refinery outages across the country, several due to complications caused by freezing weather in parts of the U.S. unaccustomed to such conditions, sparked short covering. Short covering refers to buying back a previously sold contract in the futures market, or in physical markets, buying product in the open market because of an increased need for the supply to meet demand obligations.
And while supply levels are hovering at highs last seen more than two decades ago, there was talk in trading circles that the building supply was mostly blending stocks and not finished gasoline, seeing the market much tighter than the data might suggest.
Another factor pushing gasoline prices higher in February is Brent crude futures, which is the European benchmark crude. Brent crude futures have traded above $100 barrel for most of February, pulling higher finished product prices. The U.S. benchmark crude is West Texas Intermediate, traced through its price action on the New York Mercantile Exchange, which sets the delivery location at the Cushing supply hub in Oklahoma.
Typically, NYMEX crude futures hold a premium over Brent. But recently, Brent has surged in price against the U.S. counterpart, trading at more than $15 barrel at times this month, a record spread. The Brent premium has manifested amid strong demand in Europe and production issues in the North Sea. Also, a supply disruption triggered by unrest in Egypt would have a greater initial impact on Europe, hence the increased risk premium in its oil price.
WTI has been under price pressure because of building supply at Cushing, which is land-locked, with tanks also receiving increasing supply from Canada. Refiners look to Brent prices as a more accurate indicator of crude costs in large part due to the land-locked nature of Cushing, which limits the ability to ship that supply to world markets.
The Brent market doesn’t have this restriction. As such, Brent crude is hovering over the century mark even though WTI trades in the mid-$80s barrel, while U.S. refiners are mainly indexing against the higher European crude in determining costs to operations. This has underpinned the atypical strength in wholesale gasoline prices, with the futures contract up the 3cts during the week-ended Feb. 11 while NYMEX crude futures slumped by $3.45 during the same period.
About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 15 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.