Focus Shifts to Gasoline Crack Spread
- First crude oil build in five weeks
- Products fall
- Refinery use falls 8.2 per cent in September
- End of October natural gas refill season near record
The Matrix
The U.S. Supply/Demand report issued by the Energy Information Service for the week ending October 7 showed decreases in product inventories and a gain in stocks of crude oil. Product supplies fell in every category. Notably, ULSD supplies dropped 3.7 million barrels. This led product declines that totaled ten million barrels for the week.
Crude oil inventories rose 4.8 million barrels. This was the first increase in crude oil supplies in five weeks. Together with the deep draws in product stocks, it points to sharp declines seen in refinery utilization in recent weeks. Since September 2, refinery use has fallen 8.2 percentage points. This can be seen in crude oil inputs falling more than eight per cent during September.
Growth in crude oil supplies and tightening gasoline inventories are a common situation in the fourth quarter of the year. Refinery maintenance, tuning the plant to increase diesel output, is an annual fall event.
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Tight gasoline supplies are often reflected in higher prices. And higher gasoline prices can squeeze the retailer’s margin. The gasoline crack spread, buying gasoline futures and selling crude oil futures, is a futures market structure that can be used by gasoline retailers and others who are impacted by tight margins. Buying the futures spread can offset losses in the cash market.
This year, the April gasoline crack spread is trading just over $19. It has generally rallied consistently since July, 2016 with little retracement. A fifty per cent retracement would bring prices to $16.88.
Supply/Demand Balances
Supply/demand data in the United States for the week ending October 7, 2016 were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased 5.1 million barrels during the week ending October 7, 2016.
Draws were reported in stocks of gasoline, fuel ethanol, K-jet fuel, distillates, residual fuel oil, propane, and other oils and propane. Draws were reported in stocks of fuel ethanol, distillates, residual fuel, and other oils.
Commercial crude oil supplies in the United States increased to 474.0 million barrels, a build of 4.8 million barrels.
Crude oil supplies increased in three of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks expanded 3.1 million barrels, PADD 3 (Gulf Coast) crude oil stocks grew 3.0 million barrels, and PADD 5 (West Coast) stocks increased 0.4 million barrels. Crude oil stocks in PADD 2 (Midwest) declined 1.0 million barrels and PADD 4 (Rockies) crude oil stocks experienced a draw of 0.6 million barrels.
Cushing, Oklahoma inventories decreased 1.4 million barrels to 61.3 million barrels.
Domestic crude oil production decreased 17,000 barrels daily to 8.450 million barrels per day.
Crude oil imports averaged 7.861 million barrels per day, a daily increase of 151,000 barrels. Exports expanded 41,000 barrels daily to 481,000 barrels per day.
Refineries used 85.5 per cent of capacity, a decrease of 2.8 percentage points from the previous report week.
Crude oil inputs to refineries decreased 480,000 barrels daily; there were 15.552 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 529,000 barrels daily to 15.754 million barrels daily.
Total petroleum product inventories saw a decrease of 9.9 million barrels from the previous report week.
Gasoline stocks decreased 1.9 million barrels; total stocks are 225.5 million barrels.
Demand for gasoline decreased 126,000 barrels per day to 9.264 million barrels daily.
Total product demand increased 177,000 barrels daily to 20.738 million barrels per day.
Distillate fuel oil supply increased 3.7 million barrels; total stocks are 157.0 million barrels. National distillate demand was reported at 4.266 million barrels per day during the report week. This was a weekly increase of 391,000 barrels daily.
Propane stocks decreased 0.1 million barrels to 103.9 million barrels. Current demand is estimated at 931,000 barrels per day, a decrease of 74,000 barrels daily from the previous report week.
Natural Gas
According to the Energy Information Administration:
Working gas in storage was 3,759 Bcf as of Friday, October 7, 2016, according to EIA estimates. This represents a net increase of 79 Bcf from the previous week. Stocks were 56 Bcf higher than last year at this time and 192 Bcf above the five-year average of 3,567 Bcf. At 3,759 Bcf, total working gas is above the five-year historical range.
Working gas stocks remain poised to end the 2016 refill season at near record levels. If net injections match the five-year average for the remainder of the refill season, working gas stocks will total 3,998 Bcf on October 31. This storage level exceeds the all-time end of refill season high of 3,929 Bcf in 2012. In 2015, working gas stocks totaled 3,926 Bcf at the end of October, before reaching the highest reported level of 4,009 Bcf on November 20, 2015. However, net injections into storage are 35% lower than the five-year average pace so far in the refill season, At this slower than average rate, working gas stocks will total 3,915 Bcf at the end of the refill season.
Futures trading involves significant risk and is not suitable for everyone. Transactions in securities futures, commodity and index futures and options on future markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. Past performance may not be indicative of future results. This is not an offer to invest in any investment program.
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