Schork Oil Outlook: Trading Heating Oil vs. Gasoline
The Rise and Rise of Motor Gasoline Inventories
On the final weekly DOE report ahead of the Memorial Day holiday (the start of the U.S. summer driving season), supplies of gasoline jumped by 1.8% to 209.7 MMbbls. At this point in the season we would want to see inventories at-or-above the 201 MMbbl threshold.
To this effect, aggregate supplies are in comfortable shape, especially out on the all-important West Coast (PADD V). Here, inventories of 31.7 MMbbls are at the highest high for the start of the summer season since 2003. Supplies are also flush in the PADD III refinery epicenter, standing at 69.9 MMbbls.
Therefore, while supplies in the East (PADD I) and Midwest (PADD II) are lower than what we would like to see at this point (53.1 MMbbls as opposed 56 MMbbls for PADD I and 48.6 MMbbls versus 49.1 MMbbls in PADD II) there is ample incentive to move barrels from south to north. For instance, Chicago-area conventional was recently yielding more than 7% to the Gulf Coast while Nymex futures were fetching 3½% to the Gulf.
Last night the API reported a 1.49 MMbbl build in motor gasoline inventories, well above analyst expectations of a 0.90 MMbbl build. On the breakdown, the East Coast (PADD 1) saw a 0.62 MMbbl build, easing supply concerns in an area that has seen large drawdowns this season. The Gulf of Mexico (PADD 3) reported a 0.80 MMbbl build despite a 0.17 MMbl/d drop in imports.
Demand was up 0.37 MMbbls/d as Memorial Day weekend kicked off, but this was overshadowed by a 0.39 MMbbl/d increase in production. Meanwhile distillate demand rose 0.22 MMbbls/d while distillate production only rose 75 Mbbls.
We are thus advising subscribers to that we continue to favor the heating oil crack over RBOB, especially in light of global diesel supply concerns following China’s announcement of sweeping cuts in exports to satisfy domestic demand.
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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.