U.S. Gasoline Prices Have Room to Run Higher in August

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

 By Brian Milne

Although selling off during the first trade session in August, wholesale gasoline prices in the United States could spike a dime or more per gallon ahead of Labor Day after closing out July with a rally and at the highest valuations since April.

Sharp profit taking losses ushered in August after gasoline futures traded on the New York Mercantile Exchange surged to a 3-1/2 month high on July 31, with Reformulated Blendstock for Oxygenate Blending futures nearest to delivery rallying to $1.7101 gallon. The current 2017 high for NYMEX RBOB futures was registered on April 12 at $1.7710 gallon.

NYMEX RBOB futures gained in 14 out of July’s 20 trading sessions, and in 20 sessions out of 27 since plumbing a 2017 low at $1.3955 gallon on June 21 amid a brief stint in bear market territory.

There were a string of factors that guided the market sharply higher during the six-week period, although the chief dynamic was a change in market sentiment. Data from the Commodity Futures Trading Commission shows noncommercial traders moved to a 4-1/2 month high net-long position at 57,222 futures contracts on July 25, increasing their risk exposure to higher prices by 67% from June 20.

A long position is taken on expectations prices would move higher over time while a short position is taken when the anticipation is for a price decline.

Noncommercial traders are speculators since they are not buying the futures contract to hedge an underlying position in the physical market. As such, they are an important trading group to follow to gauge market sentiment since they can easily enter or exit a futures position without unwinding a hedge.

The change in psychology didn’t happen in a vacuum however. It evolved as fundamental factors illustrated a tightening market, albeit still oversupplied, that seemed to have finally found harmony with a market narrative that production cuts by 24 oil producing nations were at long last having a viewable affect through steep inventory drawdowns.

In June, total commercial crude and oil products inventories in the United States increased and product supplied to market, or implied demand, declined, unnerving market participants betting on higher prices. This wasn’t what some analysts had been forecasting, and it followed a meeting by the Organization of the Petroleum Exporting Countries in late May in which oil ministers preached patience in allowing their agreement to cut production to unfold.

The market was already disappointed that OPEC and their 10 non-OPEC oil producing countries decided against deepening nearly 1.8 million bpd in production cuts at their May 25 meeting, with oil ministers saying the global oil market was already rebalancing. OPEC and their partners did extend the six-month agreement that took effect Jan. 1 through to March 2018.

By late June, U.S. crude and oil supply began the long awaited large drawdowns that had been promised, with commercial crude supply drawn down 29.8 million bbl or 5.8% from an early June high to July 21, according to data from the Energy Information Administration. During the same period, gasoline stocks declined 10.0 million bbl, and implied gasoline demand at 9.821 million bpd during the third week of July was just shy in outpacing the record weekly high registered in May at 9.822 million bpd. Moreover, total commercial crude and products inventories, which include gasoline, distillate fuels, kerosene-type jet fuel, propane and residual fuel oil, dropped to their lowest stock level in more than 16 months at 1.3153 billion bbl as of July 21, according to EIA data.

Now the market had evidence that a global rebalancing between supply and demand was finally underway amid the production cuts while historically low prices incentivized demand. Climbing OPEC production in June with preliminary data showing output again increased in July did threaten the price rally, but key OPEC oil ministers embarked on shuttle diplomacy with certain members that were not in compliance with their quota. Saudi Arabia also said they would limit crude exports in August to 6.6 million bpd, which is down 1.0 million bpd against the comparable year-ago period.

The global market’s geopolitical risk premium has also expanded, with events unfolding in Venezuela having the potential to boost crude and gasoline prices longer term. Considering Venezuela’s state-run oil company, Petroleos de Venezuela, owns Citgo, the fate of this OPEC member could have an outsized effect on the U.S. gasoline market.

What has been decried internationally as a brazen power grab, the indebted government of Nicolas Maduro held elections on July 30 to replace democratically elected legislators, with the new handpicked Congress to rewrite the country’s constitution. The endgame is a dictatorship for Venezuela, with the country already in a low grade civil war.

The United States sanctioned 13 high ranking Venezuelans ahead of the election, and on July 31, sanctioned Maduro himself for carrying out the election, which was boycotted by the opposition. The Trump administration has promised further action against the Maduro government, which might include restrictions on U.S. oil products exports to Venezuela or sanctions on Venezuelan crude exports to the United States.

In their Turning Point blog series, Turner, Mason and Company on Aug. 1 highlighted how dependent U.S. Gulf Coast refineries are on Venezuela’s heavy crude, with U.S. crude imports from Venezuela averaging 720,000 bpd during the first five months of 2017 and more than 750,000 bpd during the four preceding years.

“Almost all of this crude is heavy and over 95% was processed on the USGC. In fact, refineries in that region buy more heavy crude from Venezuela than from any other source, surpassing No.2 Mexico by almost 150 MBPD,” writes TMC.

The consulting engineers note most of the heavy crude in the Western Hemisphere is already flowing to the United States or under contract. A global rebalancing of the heavy crude trade flow would take time, and come with a higher price amid increased transportation costs.

These events are occurring in a world with plenty of oil, with some production that is purposely idled in position to quickly come on line. The United States could also release crude from its Strategic Petroleum Reserve. Yet, whatever course these events take over the next several weeks, the consensus is that global crude oil prices would be pushed higher, some suggest by as much as $7 bbl.

DTN is a digital provider of information services, supply chain connectivity solutions and decision-support tools to more than 80,000 customers in agriculture, oil and gas, trading and weather-sensitive industries worldwide. DTN, based in Omaha, Neb. and Minneapolis, and is owned by TBG, a private century old investment holding headquartered in Zurich.

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