Key takeaways from yesterday’s DOE report:
Let’s pick up where we left off yesterday… at the moment, refiners have apparently given up on making gasoline. Yesterday’s report appeared to confirm the prior week’s reported collapse in gasoline production. Over the last two weeks (October 09th and 16th), gasoline production averaged 8.46 MMbbl/d. That represents a drop from the prior two-week average of 803 Mbbl/d or 8.7%.
That is the second largest non hurricane-related drop in output since 1982, as far back as the DOE provides data. Mind you, gasoline supplies are comfortable for this time of year. As of last Friday supplies stood at 206.95 MMbbls; that places inventories on the higher end of the 2003-07 range. Therefore, there has been relatively little movement on the front-end of the NYMEX RBOB curve.
However, as we look ahead to next summer’s driving season, the market it is clearly growing uncomfortable with regard to supply (see chart in today’s issue of ). For instance, since the beginning of this month, the ratio on the cross-seasonal Mar’10/Apr’10 spread has tightened from 0.936 to 0.946. Furthermore, the ratio between the Apr’10 (the first summer-graded contract) and the Sep’10 (the last summer-grade contract) has shifted from a 0.996 contango to a 1.004 backwardation.
On one hand the flattening in the crude oilterm structure in New York will incent refiners to transfer the extant glut in oil supplies into products. That is pretty much a given in light of the difference in the carry markets between WTI and the products. However, we can not lose sight of the fact that the front of next summer’s marketing year 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.
Refinery activity continues to lag. Over the last four reports throughput averaged 14.3 MMbbl/d. That is 569 Mbbl/d or 3.8% below the 10-year average, exclusive of outliers in 2005 (Hurricane’s Katrina and Rita) and 2008 (Hurricane’s Gustav/Ike). The drop in throughput coincides with the plunge in the NYMEX 3:2:1 crack spread we saw in September. However, since the beginning of October the yield on the so-called refiner’s crack has been on the mend. That could translate into greater than expected demand for crude oil once refiners return from maintenance.
In the meantime, less output is a corollary of less input. That seems simple. With less crude oil going into the teapot, there is less steam coming out of the spout, hence the dearth of gasoline production. What’s more, given the premium on nearby heating oil cracks, refiners want to maximize distillate production anyway. Whereas gasoline output is down near historical lows, distillate output is right around its five-year average. Therefore, despite the spike last week in implied oil furnace demand for space-heating, the reported draw in overall stocks was well within the historical parameter.
Before we leave off, we have to say something about demand… or the lack thereof. As we just said, weather-related demand was stout last week. For example, New York City saw 108 combined degree days. That is 51 days or 90% above normal. Minneapolis saw an additional 99 days, 94% above normal.
On one hand we did get a large draw in propane, but in light of the brutal cold in the central U.S. last week, the reported 1.3 MMbbl draw seems reasonable. On the other hand, a meager 0.23 Mbbl (-0.5%) draw in PADD 1 heating stocks (>.05%) does not seem reasonable.
In fact, according to the DOE’s product supplied estimate, aggregate demand over the last four weeks averaged 18.8 MMbbl/d (see chart in today’s issue of ). That is 1.6 MMbbl/d or 8% below the 2003-2007 average. In fact, a year ago at this time the global economy was staring into the abyss, yet current demand is only 0.5% greater this year.
Oh yeah, a year ago NYMEX WTI average $91.94. This year WTI averaged a relatively modest $71.01 for the four weeks ended last Friday. All those alleged green shoots from the summer notwithstanding, oil over the last month traded at a 22% discount compared to last year, but that was only good for a 0.5% uptick in demand. Just think how strong demand is going to be now that the year-on-year price comparisons have crossed.
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Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.