Futures Market Positions Retail Gasoline for Price Advance

gasnozzleBy Brian Milne, Energy Editor for Schneider Electric

The Energy Information Administration reported a modest 0.3cts dip in its national average for regular grade gasoline for the week-ended Feb. 3 to a $3.292 gallon seven-week low while four days later the gasoline futures contract rallied to a five-week high and US crude prices topped $100 bbl for the first time in 2014, suggesting a trend change for the retail market is afoot.

Estimating turns in the gasoline average is tricky, with the recent advance in the New York Mercantile Exchange Reformulated Gasoline Blendstock for Oxygenate Blending futures contract showing bullish short-term chart formations in January. They were prescient with the nearest delivered RBOB contract, now March delivery, rallying to a five-week high at $2.7537 gallon Feb. 7. In 2014, nearest delivered RBOB futures traded at its lowest point of $2.5882 gallon Jan. 16.

Short-term technical factors remain supportive for RBOB futures, while April delivery ended Feb. 7 at a 17.5cts premium to the March contract, illustrating the seasonal strength that lies ahead for gasoline as RVP changes and refinery turnaround activity bolster fundamental support. Moreover, RBOB futures is backwardated in 2014 starting with April delivery, a bullish market structure in which delivery closest to present holds a premium to deferred delivery despite costs for inventory.

The wide spread between the March and April RBOB contracts suggest RBOB futures could top $3 gallon in early March.

RBOB futures also gained on NYMEX WTI crude futures even as the WTI contract poked above the century mark for the first time since late December; posting a trade at $100.24 bbl Feb. 7 before trimming the advance with a $99.88 bbl settlement. The contract rallied more than $2 bbl that day.

The WTI crude contract has gained following the commercial startup in January of TransCanada’s Gulf Coast Pipeline—the southern leg of the Keystone XL proposal, which adds takeaway capacity from the Cushing storage facility in Oklahoma. Cushing is the underlying delivery location for the NYMEX WTI contract.

A Reuters’ report in early February revealed the US exported crude to Great Britain and Italy in 2013, suggesting more crude oil would be exported. Exporting crude from the US requires a special permit since a ban on these exports was put in place in the mid-1970s following the Arab oil embargoes. The recent surge in US output, now at a 26-year high, has opened debate in removing the ban, with the Reuters’ report, which uncovered the news through a Freedom of Information request, bolstering sentiment for that outcome.

The gasoline crack spread, which measures the margin of return for converting a barrel of crude oil into gasoline, strengthened quickly during the first week of February after falling to its lowest point since November. Using the NYMEX WTI crude and RBOB futures contracts as proxies in estimating refiners’ profits, the RBOB crack spread ended Feb. 7 at $15.57 bbl after slumping to a $12.14 three-month low Feb. 4.

Early February proved volatile for both oil markets and equities, as investors worried over slowing emerging economies, especially China, and a poor monthly reading for US manufacturing. A second straight month with meager job growth suggested further retrenchment, however a rally ensued instead.

The Bureau of Labor Statistics reported Feb. 7 113,000 jobs were created in January, far fewer than the 190,000 expected, while following job growth of 75,000 in December. However, the US unemployment rate fell to a 6.6% five-year low, while down 0.6% since October.

The market shrugged off the bearish job growth figures even though the Labor Department suggested January’s harsh winter weather for much of the country was not a factor, with the market dubbing the findings an anomaly. Sentiment is also forming that weak job growth could slow the Federal Reserve’s hand in reeling in its asset buying plan, which has been reduced by $20 billion monthly from $85 billion per month. The spending is aimed at stimulating the economy, and the recent paring, which some initially believe would be a consistent $10 billion per month in reduced purchases going forward, has also been linked to struggling performances of late by the one-time red-hot emerging economies.

About the author

Brian L. Milne is the Energy Editor for Schneider Electric—a global specialist in energy management. Milne has been focused on the energy industry for 18 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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