In the lead up to the US 4th of July holiday, i.e., the start of the peak driving season, the forward curve of the Nymex gasoline complex is in contango for the first time since the 2007 season. Last Friday the premium on the front-month July contract closed at 1.0% to the September contract (the last contract of the summer for which 9-lb RVP product can be delivered against).
While a contango in a seasonal market is a telltale of supply concerns relative to demand, the current premium is a fraction (1/5th actually) to the 4.8% premium from back in 2007 and therefore not terribly worrisome. To that point, the spot July contract is still at a discount (-2.0%) to the July 2011 (red July) contract, whereas three seasons ago the July 2007 was sporting a 7.0% premium to the July 2008.
Furthermore, being on the eve of the peak driving season we tend to see the differential between sweet and sour crude oils move out as demand for sweet barrels (which yield a higher percentage of gasolines) picks up. However, the ratio between Light Louisiana Sweet and Mars Sour Blend is stagnating at a ten-year low; with the inference being refineries are comfortable with gasoline stocks on the cusp of peak demand.
For the record, gasoline supplies are 3.9% above the seasonally adjusted five-year average and supplies of sweet crude oil at the Nymex hub are 55% above the average. In other words, refiners are justified.
As analysts at The Schork Report look ahead to the winter-grade (15-lb RVP) season, today the discount between the first contract, October 2010, to the last winter contract, February 2011, is 1.9%. Once again, there does not appear to be much concern regarding supply for either summer or winter spec material. That is not bullish.
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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.