Why Are Gasoline Prices Moving Lower Today?
A bumpy and disorganized overnight trading session seems to be a fitting way to start the month of May, as much of the world treads cautiously towards the beginning stages of reopening after six weeks of lock-down. May Day celebrations around the world will keep trading volumes lighter than normal today, adding to the choppy action.
Most energy contracts were selling off overnight only to rally back in the past hour, with June WTI breaking north of the $20 mark for the first time since the Monday melt-down. Refined products are also struggling for direction, with nickel trading ranges in the early going and mixed results across the contracts.
A good lesion in the difference between futures and physical prices: The expiration of the May RBOB and ULSD contracts in the midst of a super contango means the June contracts are trading some seven to 11 cents higher than where May left off, but those values don’t carry over to cash markets which are seeing minimal change so far today. This phenomenon is often misunderstood, and not often talked about since in normal times the calendar spreads in futures are a small fraction of where they are today. Ask anyone who was invested in the U.S. Oil ETF last week if they understand this lesson now.
Small oil companies in the U.S. have been defying the odds for years, outpacing production estimates consistently thanks to new drilling technology. It’s little wonder that these companies are now once again exceeding estimates in their ability to shut-in production faster than expected, which should help alleviate some of the near term storage concerns. There’s a new lifeline for some of these producers as one of several new Federal Reserve lending programs has been opened to the industry this week.
The opposite of a small oil company, ExxonMobil, released earnings this morning, showing a quarterly loss for the first time in years due to a $2.9 billion non-cash write down of inventory values. The statement noted weaker refining margins both in the U.S. and around the world, but its total downstream margins were high thanks to “favorable mark-to-market derivatives and improved manufacturing on lower scheduled maintenance.”
Wondering why May RBOB settled lower Thursday even when prices were higher at the close? Read about the difference in settlement procedures on expiration day here. That will also help explain why gasoline prices are moving lower today, even while a comparison to May’s settlement makes it appear that RBOB futures are sharply higher on the day. April was a month that broke the charts, so it seems fitting to end it with more confusion.
Normal Daily Settlement Procedure
NYMEX RBOB Gasoline (RB) futures are settled by CME Group staff based on trading activity on CME Globex during the settlement period. The settlement period is defined as: 14:28:00 to 14:30:00 ET for the Active Month and 14:28:00 to 14:30:00 ET for calendar spreads.
Final Settlement Calculation for Expiring Contract
On the day of expiration, the expiring month will settle based on the VWAP of the outright CME Globex trades executed between 14:00:00 and 14:30:00 ET.
Click here to download a PDF of today's TACenergy Market Talk.
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The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.