Gasoline Crack Spreads Teed Up To Rally


1. Crude oil glut this winter (bearish)
2. Strong product demand outlook (bullish)
3. Slowdown in crude oil production is modest
4. Natural gas stocks at record high


Al pic 2009_cropped

Alan Levine Chairman, Powerhouse
Table covers crude oil and principal products. Other products, including residual fuel oil and “other oils” are not shown, and changes in the stocks of these products are reflected in “Total Petroleum Products.” Statistics Source: Energy Information Administration “Weekly Petroleum Status Report” available at

The Matrix

November is typically the time that traders begin to buy the gasoline crack spread. This year, the gasoline crack spreads are displaying seasonal bullish tendencies. The May gasoline crack spread, for example, bottomed on October 20th at $17.07. It has since rallied, reaching $20.11 on Wednesday, November 4th, before setting back slightly.
Strength in the gasoline crack spread this year reflects the worldwide crude oil glut that has developed as OPEC has produced to maintain market share. Also, global growth in demand has been accentuated by low price. Demand gains are outpacing refinery capacities, supporting refiners’ margins. This is a formula for higher crack spreads, especially in the spring where the effect of winter turnarounds exacerbates the difference between crude oil and gasoline.


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There seems not to be an end to bloated crude oil stocks. Data released by the Energy Information Administration for U.S. supply showed more crude oil added to stocks. The Gulf Coast set another regional storage record of 252 million barrels during the week ending October 30th. National inventories are near the record established earlier this year. Now at 483 million barrels, domestic commercial crude oil supplies could reach a half-billion barrels, except as renewed refining requires crude oil feedstock.

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There have been, of course, indications of modest slowdowns in new crude oil production. An oil workers’ strike in Brazil has taken about 500,000 barrels of crude oil out of production daily, at least for now. There has also been a shift in supply for East Coast refineries. Oil from North Dakota is being replaced by imports, justified by comparative economics. A Philadelphia refiner “disclosed that it is only budgeting to take 25,000 barrels a day of Bakken oil delivered by rail at its East Coast refineries in 2016.”

High product inventories could create bearish sentiment for gasoline and distillate fuel oil in the short term. A longer term view appears to be more bullish, reflecting strong demand expectations.


Supply/Demand Balances

Supply/demand data in the United States for the week ending October 30, 2015 were released by the Energy Information Administration.

Total commercial stocks of petroleum decreased 2.3 million net barrels during the week ending October 23, 2015.

Draws were reported in stocks of RBOB, K-jet fuel, distillates, and other oils. A build was reported in stocks of fuel ethanol, residual fuel oil, and propane stocks.
Crude oil supplies in the United States increased to 482.8 million barrels, a build of 2.8 million barrels.

Crude oil supplies increased all five PAD Districts. PADD 1 (East Coast) crude oil stocks added 0.4 million barrels, PADD 2 (Midwest) stocks increased 0.2 million barrels, PADD 3 (Gulf Coast) stocks rose 1.1 million barrels, PADD 4 (Rockies) experienced a build of 0.1 million barrels, and PADD 5 (West Coast) stocks increased 1.0 million barrels.

Cushing, Oklahoma inventories declined 0.2 million barrels to 53.1.

Domestic crude oil production increased 48,000 barrels to 9.160 million barrels per day.

Crude oil imports averaged 6.943 million barrels per day, a daily decrease of 89,000 barrels.

Refineries used 88.7 per cent of capacity, an increase of 1.1 percentage points from the previous report week.

Crude oil inputs to refineries increased 21,000 barrels daily; there were 15.637 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 188,000 barrels to 16.014 million barrels daily.

Total petroleum product inventories saw a decrease of 5.1 million barrels. Gasoline stocks decreased 3.3 million barrels; total stocks are 215.3 million barrels.

Total product demand decreased 827,000 barrels daily to 19.477 million barrels per day.

Demand for gasoline decreased 159,000 barrels per day to 9.184 million barrels daily.

Distillate fuel oil supply decreased 1.3 million barrels. National demand was reported at 4.006 million barrels per day during the report week. This was a weekly decrease of 255,000 barrels daily.

Propane stocks increased 0.8 million barrels to 102.4 million barrels. Current demand is estimated at 0.827 million barrels per day, a decrease of 197,000 barrels daily from the previous report week.


Natural Gas

According to the EIA:

Working gas stocks equal highest recorded levels. Despite the below-average weekly inventory build, working gas climbed to tie the record high of 3,929 Bcf reported for the week ending November 2, 2012. Working gas stocks appear poised to establish an all-time record high in next week’s storage report if working gas stocks increase during the coming week, as typically occurs in early November.

From April 3 (the beginning of the injection season) through October 30, net storage injections totaled 2,453 Bcf, or 280 Bcf lower than the 2,733 Bcf injected during the same 30 weeks in 2014. During these weeks for the years 2010-14, net injections into storage averaged 2,133 Bcf.

EIA has estimated the value of natural gas in storage during the injection season. In 2015, the Administration puts the value of natural gas in storage at $2.69 per mmBtu. Last year, gas in storage was worth $4.20 per mmBtu.

Price bulls are hoping that the current price level is unsustainably low. One technician points out that “every single major low in the history of Natgas futures, with one lone exception, was part of a double bottom. … If Natgas just discounted a winter with no weather, I must wonder whether the $1.948 ‘no winter low’ is a major double bottom against the $1.902 low [April 2012].”


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