The draw in gasoline raised some eyebrows, but there are signs that allow us to be cautiously optimistic. First things first, we are still concerned with regard to the supply situation in the East, PADD I. Overall capacity utilization surged 330 bps to 85.1%. Nevertheless, crude oil throughput dropped 5% to 1.2 MMbbl/d in the East. Consequently, PADD I supplies of gasoline dropped 2% to 52.7 MMbbls.
A year ago as we made plans to head to the beach (aka, da shore for you Philadelphians), gasoline stocks on the eve of the U.S. Memorial Day holiday were 55.3 MMbbls and the average of the five seasons before that (2003 to 2007) were 56.2 MMbbls. So supplies are a few million barrels or around 5½% below recent metrics. That is the bad news… and we can expect that news to remain poor through at least next Wednesday’s report. Last week’s numbers in the East were undoubtedly skewed to some degree by unplanned outages at Sunoco’s Marcus Hook and Valero’s Delaware City facilities. These outages compounded Sunoco’s April decision to shut-in one of its two FCC units at its Philadelphia (335 Mbbl/d) refinery. That shut-in was spurred by poor economics.
Last week both companies announced they were in the process of ramping production back up. As far as the economics go, the week prior to Sunoco’s April 22nd announced shut-in of its Philadelphia FCC, NYMEX July RBOB was trading at 115 cents on the dollar to WTI. This week July RBOB is trading around 122 cents. However, while Sunoco was re-starting its economically challenged FCC in Philly last week, “mechanical problems” at the facility shutdown the other FCC. The impact from this shut-in, which reportedly lasted for around 24 hours, will likely be felt in next week’s report. More importantly, the economics have improved. While 122 cents on the dollar is around a dime below normal, it beats 115 cents. Furthermore, as we noted in yesterday’s issue of The Schork Report, the backwardation in the NYMEX summer-grade curve will spur even greater production.
All in all, we were encouraged by yesterday’s report. Imports were low, but we know why. Crude oil stocks fell, but refinery utilization and production rose… exactly what you want to see in the lead up to the start of the U.S. driving season. Demand also rose, but just as we saw with last week’s decision by Sunoco, the economics to produce more gasoline are improving. To wit, output in the East is working through recent unscheduled refinery hiccups. Assuming we do not run into further ones, the trend will continue to improve and gasoline will find its way to the market through June and towards the 04th of the July holiday.
But is just doesn’t matter. As we wrote in our May 07th report…
What started out as a bear market rally in equities back in March is now in the process of morphing into a full fledged rally. Sidelined money, disgruntled and dismayed that it has missed the bull’s party of the last two months, is now reluctantly piling back into the market. Some of this money is finding its way onto the NYMEX. The Street has convinced itself the recession is over. Two months ago traders were buying because they wanted to “participate” in the equities rally before the bear market resumed. Today these same traders are spinning a dubious fundamental case because dour economic headlines, which the market receives nearly daily, are less bad. Thus, the crude oil bulls have hitched their wagon to the equities. And, they are going to continue to do so until it stops working for them.
The day before we wrote this we changedour technical bias in WTI to bullish. Since then spot July on the NYMEX is up around 12½%. In other words, it is still working for the bulls… and there is no reason to think they are going to stop buying now.
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.