Product Price Changes Reflect Market Chaos
- Kero-Jet demand craters
- ULSD demand and stocks rise
- ULSD price a buck lower than last year= price cap opportunity
- RBOB and ULSD moving toward parity
- Natural gas resumes range trading
Distillate fuel supply/demand balances are a good measure of general economic activity. Distillates accounted for 23% of demand in the most recent EIA petroleum balance report for the week ending May 8, 2020. Its versatility stems from its use in on-highway diesel fuels and off-road engines in railroad and agricultural uses. It is also used for space heating and power generation.
Gasoline represented 44% of petroleum demand in the same period. Its usage, however, is less diverse than distillate fuel oil, focusing on on-road consumption.
In the most recent EIA report, gasoline supplies fell to 253 million barrels. This was a 3.5-million-barrel decline during the week. It is consistent with consumer demand recovering as the United States attempts to resume commerce and regular activity after sheltering-in-place for many weeks.
Distillate fuel oil, the commercial mainstay, added 3.5 million barrels to inventories. This increase occurred despite a weekly gain in distillate demand to 3.8 million barrels daily.
One explanation for this apparent contradiction probably lies in the effect of shrunken economic activity on the aviation industry. Demand for K-jet registered 352,000 barrels per day for the Report week. The fuel’s demand fell 163,000 barrels daily during the week, a 32% drop in that time. Putting this in perspective, jet fuel usage fell 80 percent compared with the same week in 2019.
The loss of demand for jet fuel was met with changes to refinery product slates. Refiners have the ability to adjust outputs to some degree (one refiner said yields could swing about 10% between gasoline and ULSD.) This includes jet.
The increase in ULSD demand did not draw enough inventory to reduce stocks, and the nearby futures price of ULSD has moved just over a dollar.
Some dealers mourn their failure to buy the $0.60 lows seen in April. They missed that opportunity to establish well-priced hedge positions.
In reality, November ULSD prices lie about $0.83 below autumn prices over the past five years.. This gives dealers offering a price cap an opportunity to beat their last-year cap substantially. And option premiums for the heating season are priced around $0.15 for an at-the-money strike. This is an altogether very attractive package for the 2020-2021 winter.
Another interesting fall price dynamic may be developing. The price of gasoline in November has been lower than that of ULSD over the past six years. Gasoline demand is now expanding while ULSD stocks are growing. It is possible that ULSD’s long-held premium to gasoline may evaporate as expansion of the economy wrestles with businesses struggling to recover.
Supply/demand data in the United States for the week ending May 8, 2020, were released by the Energy Information Administration.
Total commercial stocks of petroleum fell by 0.5 million barrels during the week ending May 8, 2020.
Commercial crude oil supplies in the United States decreased by 0.7 million barrels from the previous report week to 531.5 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Plus 1.1 million barrels to 13.1 million barrels
PADD 2: Down 3.4 million barrels to 153.3 million barrels
PADD 3: Down 0.2 million barrels to 282.5 million barrels
PADD 4: Down 0.5 from the previous report week to 24.2 million barrels
PADD 5: Plus 2.1 million barrels to 58.2 million barrels
Cushing, Oklahoma inventories were down 3.0 million barrels from the previous report week to 62.4 million barrels.
Domestic crude oil production was fell 0.3 million barrels per day from the previous report week to 11.6 million barrels daily.
Crude oil imports averaged 5.391 million barrels per day, a daily decrease of 321,000 barrels. Exports fell 21,000 barrels daily to 3.525 million barrels per day.
Refineries used 67.9% of capacity, down 2.6% from the previous report week.
Crude oil inputs to refineries decreased 593,000 barrels daily; there were 12.383 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 499,000 barrels daily to reach 12.883 million barrels daily.
Total petroleum product inventories rose 0.2 million barrels from the previous report week.
Gasoline stocks decreased 3.5 million barrels daily from the previous report week; total stocks are 252.9 million barrels.
Demand for gasoline rose 734,000 barrels per day to 7.398 million barrels per day.
Total product demand increased 1.46 million barrels daily to 16.814 million barrels per day.
Distillate fuel oil stocks increased 3.5 million barrels from the previous report week; distillate stocks are at 155.0 million barrels. EIA reported national distillate demand at 3.818 million barrels per day during the report week, an increase of 689,000 barrels daily.
Propane stocks increased 2.2 million barrels from the previous report week; propane stocks are 61.6 million barrels. The report estimated current demand at 868,000 barrels per day, an increase of 43,000 barrels daily from the previous report week.
Natural gas futures prices remain in a range. After reaching a high of $2.16 on May 5, 2020, prices retreated to $1.595, describing a range which has characterized futures pricing for several weeks. Incidents like the TETCO explosion in Kentucky have not materially affected supply because most the natural gas affected has been rerouted.
According to EIA:
The net injections to working gas totaled 103 billion cubic feet (Bcf) for the week ending May 8. Working natural gas stocks totaled 2,422 Bcf, which is 49% more than the year-ago level and 21% more than the five-year (2015–19) average for this week.
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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