The Nymex energy complex ended last week on a very strong note. The gasoline contract (RBOB) for June delivery closed at 313.02. That translates into a national average price for retail gasoline of ?$3.70 a gallon by the 04th of July holiday. To this effect, we are prepared for a material decline in demand elasticities.
In fact, consider that as of March 28, the DOE estimates the national average for retail gasoline at $3.596 a gallon. That is the highest high in the month of March for the real price (i.e. adjusted for inflation) of retail gasoline going back to 1976 (the year following the Arab oil embargo). The previous record, $3.540, occurred in 1981. The average of the previous five highest real prices (1981, 1980, 2008, 1982 and 2010) is $3.217 ±$0.148.
It should then be little wonder that apparent demand for gasoline today is falling. Per last Wednesday’s weekly update from the DOE, the amount of gasoline supplied to the market fell by 2.3% to 8.87 MMbbl/d. The four-week average is approximately 9.03 MMbbl/d and has been trending lower over the last three reports.
Owing to student spring-break vacations as well as the Easter and Passover holidays, discretionary demand for gasoline typically picks up at this point in the season. This makes the recent pullback in consumption even more telling.
With demand suspect, what about supply? Total crude oil supplies in the United States, 355.7 MMbbls, are 4.2% above the upper limit of the 95% confidence interval (CI) of the mean from the previous ten years. Gasoline supplies, 217.0 MMbbls, which have had a precipitous fall over last month-and-a-half, remain near the upper limit, 218.3 MMbbls, of the 95% CI.
In spite of these metrics Wall Street shrugs. Per Friday’s update from the CFTC, money managers were sitting on net length of 61,253 contracts of RBOB and 38,624 contracts of heating oil.
Juxtapose this speculative length to DOE commercial stocks. At present there are 32.8 MMbbls of gasoline and 30.96 MMbbls of distillate fuels in PADD IB (inclusive of the Nymex delivery hub in New York Harbor). The upper limit of the 95% CI is 33.2 MMbbls for gasoline and 27.4 MMbbls for distillates.
As written in today’s issue of The Schork Report , demand for petroleum products is falling while supplies are near the upper limits of the historical range. More importantly, the current price path on the Nymex indicates that demand inelasticity for gasoline this summer will fall even further.
How long can Wall Street continue to ignore this fundamental?
Longer than you can remain solvent.
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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.