Fasten your seatbelts: St. John puts the squeeze on...
Yesterday (Wednesday), spot Nymex gasoline for January delivery surged by 11.4 cents a gallon (+5.2%) on an apparent physical squeeze in the Northeast. The contract was lower past midnight EST, but as soon as it went positive (around 4am EST) the rally was on. A surge yesterday morning in the premium (+$0.07) of physical gasoline in New York Harbor to the futures contract generated suspicion of a squeeze in the market. As such, the rally was already on before traders in the U.S. arrived at their screens.
As detailed in today’s issue of The Schork Report , yesterday’s DOE report exacerbated the rally in gasoline, but it was not the cause of it… and, for the record, contrary to what some talking heads are spouting, yesterday’s ADP employment report had !@#$% NOTHING to do with a 5% spike in spot gasoline.
In this vein, yesterday the EIA reported a 0.94 MMbbl decline (-1.8%) in east coast (PADD I) supplies of gasoline. Supplies are now below the seasonal range relative to the norm since the start of the decade. More importantly, in the New England market area (PADD IA) stocks of 3.73 MMbbls are near the bottom of their respective range and in the central east coast, inclusive of the Nymex delivery hub in New York Harbor (PADD IB), stocks of 23.2 MMbbls are well below (?11%) normal.
"A run at the post 2008-bubble highs of 244.11 from last spring (03-May) cannot be ruled out."
Along this backdrop, Irving Oil shutting an FCC unit at its St. John (NB) refinery, the largest in Canada, only provided the bulls with more ammo when news hit the wires an hour after the DOE report came out. Be that as it may, given where gasoline was already trading in the wee hours of the morning, it is clear that Randolph and Mortimer (aka the Dukes) already knew about the Irving news.
As far as the Nymex spike is concerned, the discount between the spot January contract (15-lb RVP) and the April (the first summer-grade 9-lb contract) has collapsed from 12.2 cents last Friday to 7.3 cents last night, —40%! The Irving refinery in New Brunswick, which supplies product into the U.S. Northeast, is expected to be back up by the weekend. Therefore, this begs the question, once this short-run supply issue is alleviated, what are the long-run prospects for yesterday’s spec bulls?
Goodness knows rallies have been built on lesser events. Thus, a run at the post 2008-bubble highs of 244.11 from last spring (03-May) cannot be ruled out. As far as we are concerned, spot RBOB is now butting up against significant resistance in between 231.26 and 232.47. Analysts at The Schork Report advise that if the bulls succeed in pushing through this level then we could see a run towards the 240.95 to 248.86 range. On the other hand, given where volume has traded over the last five sessions we reckon there should be solid support in the January from 223.02 to 217.31. A failure to support this level sets the table for a flush.
Buckle your seatbelts, this could get ugly.
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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.