The flooding along the Mississippi River and the potential impact to downstream capacity at the mouth of the River was digested over the weekend. Nymex gasoline opened yesterday's pit session on the bid as a result. That is not hard to understand. The only question is, was yesterday's 10.8% surge (trough-to-peak) in spot Nymex gasoline justified by the potential disruption to Gulf Coast refining capacity or was it a proverbial dead-cat-bounce?
From a supply perspective, the fundamentals are compelling. This turnaround-season has been compounded by a number of significant refinery outages, most recently, the power outage in Texas City in the last week of April which affected around 800 Mbbl/d of refining capacity.
Now we have the development that upwards of 2.5 MMbbl/d of refining capacity (from Baton Rouge to New Orleans) is vulnerable to flooding of the Mississippi.
That’s a problem.
This has already been a difficult transition from winter/spring-grade to summer-grade gasoline with some market areas in PADD I reportedly running out of product at the end of April. More to the point, overall supplies of gasoline, 204.5 MMbbls, are within the seasonal norm, but supplies in PADD I (East Coast) of 48 MMbbls are well, well below normal, i.e., about 9% below what we calculate to be the low end of the seasonal range.
Supplies in important market areas are tight. On the other hand, there is plenty of empirical and anecdotal evidence to suggest that demand elasticity has been impacted, greatly. Thus, we are left with the conundrum, a disruption to capacity in the U.S. refinery epicenter will surely underpin gasoline prices, but with demand already flagging, how much higher can bulls push the market for crude oil?
After all, a lack of refining capacity implies a lack of crude oil demand. Furthermore, gasoline margins are fat. Therefore, once these disruptions are solved, refiners have tremendous incentive to get as much gasoline onto the market as is logistically possible.
In the meantime, where exactly are we with oil? Yesterday, the Financial Times reported that:
Clive Capital, the world’s largest commodity hedge fund, has been left nursing losses of more than $400m as a result of the collapse in the price of oil last week.
London-based Clive – which manages an estimated $5bn of client money – is the biggest of several large hedge funds believed to be reeling after the unexpected sell-off hit markets late last week.
Others, including Astenbeck Capital, the Phibro-owned fund run by Andrew Hall, are thought to have taken double-digit percentage point losses to their portfolios, according to investors.
As written in today’s issue of The Schork Report — yowza! What’s this market coming to if Andy Hall is reportedly on the wrong side?
So to answer our question of whether yesterday's price path was justified or was it a dead-cat-bounce, we will venture… both. Given the news, the rise was likely justified, to a degree, but as is often the case, the bulls got too greedy.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.