Yesterday’s support above $85 notwithstanding, a steepening contango over the last week on the NYMEX is indicative of waning concerns of demand, relative to supply.
Thus, as the contango grows, the incentive to store, rather than boil, crude oil grows… and, as one might reasonably assume, when the market is paying to stockpile barrels rather then consume them, that is a bearish fundamental signal.
Imports as a whole were up 5.5%, the surplus to April 2009 is now 2.5%, and imports now stand at their highest point since September. It is normal for crude imports to increase during the run up to the summer driving season, but this year’s increase is acutely sharp. For the major products, gasoline saw a large 2.50 MMbbl draw, outpacing analyst expectations of a 0.96 MMbbl draw. The draw even tested 3.0 MMbbls, the largest draw predicted by analysts on an industry survey. Yet gasoline prices dropped sharply in the hours after the release.
The gasoline crack traded higher in early morning trading as crude oil stagnated and gasoline rose ~0.3%. Traders expected this relationship to sharpen after the DOE release – large build in crude, large draw in gasoline- was ostensibly bullish for the crack. Instead we saw good news, bad action as gasoline sold off even harder than crude oil.
As long time readers of will know, the correlation between inventories and prices should be negative. High stocks lead to concerns of low demand and prices drop in a bid to boost demand. The opposite holds for low stock levels. However, this correlation has broken down in 2010. In 2006, correlation was -0.64, in 2005 -0.51. In 2010, it is 0.15. The last time we saw correlation at these levels was during the same timestep (January to April) in 2008.
What else happened in 2008? As the Chart of the Day in today’s issue of illustrates, the Nymex 321 crack spread (the so-called refiner’s crack) failed to see its seasonal pop as crude oil rose irrationally fast.
The difference between 2008 and today is that prices rose in line with stocks in 2008, whereas today prices are falling in line with stocks. This could be a bullish indicator for RBOB but ONLY if demand increases relative to supplies. In this regard, similar to what we saw in WTI over the last week, the front of the NYMEX curve has collapsed… on the eve of the driving season… that is indeed, bearish.
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.