CNBC Guest Blog

Published: Thursday, 29 Oct 2009 | 11:25 AM ET

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Stephen Schork
Editor of
"The Schork Report"

Refinery activity continues to lag. Over the last four DOE reports throughput averaged 14.5 MMbbl/d. That is 278 Mbbl/d or 1.9% below the 5-year average, inclusive of the 2005 Katrina/Rita outlier. This drop coincided with the plunge in the NYMEX 3:2:1 crack spread that began in the second half of September in the wake of the RVP switchover.

For instance, through the first 15 calendar days of September, the spot crack averaged $5.22 a barrel for a yield of 7½% on WTI. In the last 15 calendar days of the month, inclusive of the quality spec change to 13.5 RVP gasolines, the average crack dropped to $4.14 a barrel for a yield on WTI of 5.95%.

However, the so-called refiners crack has jumped more than 50% since the first half of this month, from below $4 a barrel to over $6, for a yield to WTI of 7.7%.  Through the first three sessions of this week the crack is averaging a relatively lofty $7 a barrel, 8.9% yield.  Last year the 3:2:1 crack averaged $4.371 a barrel, with a yield of 6.1% to WTI through the first half of the fourth quarter.

However, the combination of the implosion in the energy bubble, coupled with this recession’s nadir pulled the crack below breakeven through the second half of the quarter; to minus $6.92 a barrel; for a negative yield to WTI of 12.2%.  Thus, unlike a year ago, margins are now moving in a positive direction. As we can see in the chart in today’s issue of The Schork Report , this could translate into greater demand for crude oil once refiners return from maintenance.

Gasoline production is back… at least for one DOE report.  Output as of last week was 4½% higher than the average of the prior two reports. What’s more, while overall shipments of gasoline are low (0.78 MMbbl/d over the last four weeks), imports of gasoline blendstocks have been coming in well above seasonal norms.  That is a sign refiners are planning to ramp up production post turnarounds.

Gasoline supplies are certainly comfortable, i.e. 13.6 MMbbls (7%) above a year ago and 10.6 MMbbls (5.4%) above the 2003-07 timestep. Be that as it may, in light of Big Oil’s third quarter earnings’ reports and the obligatory shut-in announcements in the aftermath of the reported downstream carnage, traders on the NYMEX have grown quite uncomfortable regarding the future availability of gasoline.  For instance, spot November RBOB has moved into a backwardation over the last two sessions.

More to the point, a week ago the DOE reported a much larger than expected 2.2 MMbbl draw in gasoline stocks. In the wake of that report spot NYMEX RBOB for November delivery rallied 6.4 cents or 2.9% to a 52-week high, 225.17. Yesterday the DOE reported an unexpected build in gasoline and spot RBOB plunged by 8.5 cents or 4.1%.

Okay, so far, so good… the market gets a much larger than expected draw and gasoline rallies, the market then gets an unexpected build and gasoline futures tank. We get that. However, despite the week-on-week weakness, the forward curve narrowed. That is hard to reconcile.

Despite the surfeit of nearby supply, the premium on owning gasoline on the front of the NYMEX curve is gaining on the back. That usually occurs when the market perceives tightness in the future availability of supply… and that is usually a bullish signal.

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Stephen Schork is the Editor of, "The Schork Report" and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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