By Brian L. Milne, Refined Fuels Editor, Telvent DTN
“Say it ain’t so Joe,” references a line in a movie from a young fan to “Shoeless” Joe Jackson on revelation eight members of the White Sox conspired to lose the 1919 World Series. Drivers in the U.S. might be singing a similar phrase about gasoline prices after a price explosion in gasoline futures during the final week of September.
The Energy Information Administration’s (EIA) U.S. average price for regular grade gasoline snapped a series of consecutive weekly gains since the start of July on Sept. 24, ending the advance after 11 weeks. The average shot up 52.2 cents or 15.6% to a $3.878 gallon five-month during that time before sliding 5.2 cents. Now, wholesale gasoline costs are again moving higher, and so will retail prices.
In a classic short squeeze, the New York Mercantile Exchange RBOB (reformulated blendstock for oxygenate blending) futures contract for October delivery spiked 39.95 cents during the final week of September, and in front of its expiration on Friday (9/28). At one point in Friday’s trading, the contract surged 28.15 cents to a $3.4258 gallon six-month high on the spot continuation chart, nearly taking out the 2012 high set on March 29 at $3.4455 gallon. The contract expired at $3.3420 gallon.
View Telvent DTN’s Weekly and Historical Fuel Price Index.
A short squeeze refers to a situation in which market participants in a short position, which is one in which the expectation is that prices would decline, are instead caught in a rising market that forces them to cover their losing position at a higher price. Usually there’s time to accomplish this trade, but last week’s rally was abrupt, and those holding short October RBOB positions were forced to pay up.
On Sept. 26, a midday explosion at Irving Oil’s 300,000 barrels per day St. John refinery in New Brunswick, Canada, triggered a rally in gasoline futures, with the refinery exporting as much as 80% of its product to the United States. The refinery was in an annual turnaround, and the explosion was in a non-producing part of the refinery, occurring when a storage tank was over-pressurized during maintenance. The explosion caused one employee to sustain minor injuries. The refinery resumed its normal activities later that afternoon.
Yet, the explosion focused the market on low gasoline supplies, especially in the Northeast, where supply is at a four-year low and Irving ships much of its gasoline. The explosion occurred shortly after the EIA reported an unexpected drawdown in domestic gasoline supplies that was already pushing up prices, and the explosion spooked the market.
The rally continued through Friday as those expecting to reap a profit based on the typical decline in gasoline prices this late in the year were caught on the wrong side of the market. They got bloodied.
Gasoline prices in spot markets, which index off futures, did not rally anywhere near the surge in futures, with many markets already rolling forward to benchmarking off the November contract, which ended Friday at a more than 40.0cts discount to October. Still, wholesale prices went up, especially in the New York Harbor market where supply is tight.
Combine this move with an improving sentiment for the US economy, a positive response from European leaders regarding Spain’s 2013 budget announced on Sept. 27 that was more than ample in meeting conditions to secure bailout funding, stimulus measures taken by China, and heightening geopolitical tension, and we have a higher moving oil market.
Gasoline prices will fade as we advance through the newly minted quarter. However, that relief for U.S. drivers will now take a backseat during the early days of fall.
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 16 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.