Recent builds in U.S. gasoline inventories raises trader speculation that the spring’s record-high refinery activity and faltering demand could remove a pillar of support in the oil complex, according to an S&P Global Platts preview of this week’s pending U.S. Energy Information Administration (EIA) oil stocks data.
Survey of Analysts Results:
Gasoline stocks expected to drop 750,000 barrels
Distillate stocks expected to decline 250,000 barrels
Refinery utilization expected to rise 0.3 percentage points
Crude stocks called down 2 million barrels
Front-month New York Mercantile Exchange (NYMEX) reformulated blend stock for oxygenate blending (RBOB) contracts plunged last Wednesday following the release of EIA weekly storage data, and kept falling Thursday to the lowest point of the year.
Crude oil futures followed suit, although front-month contracts for NYMEX crude and Intercontinental Exchange (ICE) Brent managed to stay above respective year-to-date lows that were set May 5 during overnight trading.
The relationship between crude and gasoline prices is important because relative weakness in RBOB futures lowers the crack price spread, and can eventually convince refiners to slow down. This, in turn, means less crude demand.
Such would mark a turnaround after weekly crude runs set all-time highs twice so far this this spring, laying the groundwork for consistent draws in crude stocks since April.
High levels of refinery utilization have also focused the market’s attention on the health of the gasoline market, and specifically whether demand will prove sufficient to absorb the additional supply.
The latest EIA data — showing U.S. gasoline stocks built for the second straight week by 5.4 million barrels over that period — galvanized the market around a bearish narrative.
Gasoline demand was seen ebbing at a critical juncture just before summer began, causing unexpected storage builds that could presage further weakness.
Implied* gasoline demand averaged 9.293 million barrels per day (b/d) during the two weeks ending June 9, which was 470,000 b/d below the two weeks prior to that, and 372,000 b/d less than the same period a year ago, according to EIA data.
But that comparison is skewed by the high baseline of 2016 when gasoline demand hit record highs. Over the last two weeks, gasoline demand averaged 169,000 b/d more than the five-year average.
Still, there are bullish elements within the gasoline market. RBOB cracks bounced last week after ExxonMobil shut a gasoline-making unit at its refinery in Joliet, Illinois.
The front-month NYMEX RBOB crack spread against West Texas Intermediate (WTI) was trading Monday afternoon at around $16.60/b, up from $14.80/b at one point Thursday, the contract’s low point since rolling to the summer-spec in late February.
A counter-seasonal drawdown in gasoline stocks could also help the crack recover. Analysts surveyed Monday by S&P Global Platts expect gasoline stocks to show a drop of 750,000 barrels for the latest reporting week ended Friday. This would compare to an average build of roughly 630,000 barrels for the same reporting period from the 2012-2016 period.
A fire that erupted last week at Pemex’s 330,000 b/d Salina Cruz refinery on the Pacific coast of Mexico was price supportive for U.S. Gulf Coast gasoline prices, as well as the region’s diesel market.
ULTRA-LOW SULFUR DIESEL (ULSD) SET FOR SHORT-COVERING RALLY?
On Thursday, S&P Global Platts assessed U.S. Gulf Coast ULSD 65 points higher at NYMEX July ULSD futures minus 3.65 cents per gallon (/gal), the biggest day-on-day rise since January 30 and up from a multi-year low of minus 5.1 cents/gal June 5.
Favorable diesel arbitrage economics from the U.S. Gulf Coast (USGC) to Europe were also cited by traders as helping strengthen USGC diesel prices.
The amount of distillates expected to arrive in Europe and the Mediterranean basin in June from the Gulf Coast is around 1.45 million metric tons (mt), according to Platts trade flow software cFlow.That would be the most since July 2016, and should help trim the surplus of USGC stocks of low and ultra-low sulfur diesel to the five-year average, which equaled 6.8 million barrels the week that ended June 9.
The inability for U.S. distillate stocks to clear has led speculators to pile into bearish bets with respect to NYMEX ULSD futures. In the week ending June 13, money manager shorts were at their highest since December 2015, and the net short position the most since March 2016, according to Commodity Futures Trading Commission data.
That could also present an opportunity for a short-covering rally on even moderately bullish news, such as EIA data showing a small, counter-seasonal draw in distillate stocks.
Analysts are looking for distillate stocks to have fallen 250,000 barrels last week. Inventories rose around 770,000 barrels for the same reporting period from 2012-16.
CRUDE STOCKS CUTTING SURPLUS
Limiting the size of a distillate draw could be U.S. refinery utilization, which is expected to show a rise of 0.3 percentage points to 94.7% of capacity.
If confirmed, that would easily exceed the year-ago rate that stood at 91.3%, extending a trend of higher-than-normal refinery utilization that has been a major driver behind U.S. crude draws.
U.S. crude stocks have fallen nine of the last ten weeks. Analysts are looking for another draw of 2 million barrels last week. The five-year average shows a 180,000-barrel decline the same week.
Those steady draws have reduced the surplus to the five-year average by 27.5 million barrels since the end of March, down to 109 million barrels.
But traders have overlooked these headlines, taking cues instead from rising U.S. crude production and steadily high imports, both of which represent major headwinds for oil futures.
Even U.S. crude exports, which have climbed this year after WTI flipped to a discount to Dubai crude, could be seen as bearish on balance because it represents additional supply in the global market.
Some of the barrels displaced by U.S. production has struggled to find a home, evidenced by the roughly 7.3 million barrels of BFOE (Brent, Fortis, Oseberg, Ekofisk) crude oil floating around the North Sea last week.
Source: PlattsPrevious Next