Here we go again … oil bulls returned with a vengeance on the first of the month last week as desperate fund managers scrambled in a last ditch effort to salvage what has been a rather dismal year for most of them thus far.
Tight gasoline supplies in the Northeast and an unexpected outage at a key refinery at St. John, NB (Irving) on Wednesday got the ball rolling in the cash market for winter-grade gasoline in New York Harbor. Strength in the physical then metastasized quickly to the futures as speculators awoke to their “good” fortune.
As such, spot NYMEX gasoline for January delivery led the energy complex higher with an 8.97% gain on the week. More telling was the collapse in the gasoline term structure. The discount between the spot winter contract (15-lb RVP) for January delivery and the April (the first summer-grade 9-lb contract) narrowed by 224 bps from 5½% to 3.3% or from 12.2 cents a gallon to 7.8 cents.
The concern regarding East Coast supplies is not unfounded, i.e. they are low, as is production and demand is strong. For last summer’s driving season (May through September) we would have expected demand (as measured by the amount of product supplied) to average in between 103.6 and 99.7 MMbbls.
According to the EIA’s monthly numbers demand was actually around 102.3 MMbbls. More recently, demand in September was 99.6 MMbbls, whereas we would have expected demand on the high end of around 96.9 MMbbls.
Furthermore, imports are virtually nonexistent. Mogas cargoes have been only around five-ninths of the low end of what we deem normal for this point in the season. On top of the that, the current structure in the crack market continues to incentivize U.S. refiners to maximize distillate production at the expense of mogas output.
Last Thursday we noted that spot NYMEX gasoline was butting up against significant resistance in between 231.26 and 232.47. We were of the opinion that if the bulls succeed in pushing through this level that we could see a run towards the 240.95 to 248.86 range.