WALL, N.J. -- Want to win a bet with fellow marketers or even suppliers?
Here’s how. Simply make a wager that only 47 days into 2015, the U.S. gasoline futures’ market has already seen a price spike greater than those that occurred in 2014 or 2013.
It’s true. With March just around the corner, the last 22 business days have delivered a trough-to-peak rally in RBOB futures that betters seven of the NYMEX increases since gasoline began trading in 1983.
The world is indeed working through a once-in-a-generation crude-oil price collapse, but human nature still prevails, making gasoline subject to the same overzealous patterns of buying and selling that have been witnessed for 32 years. The off-season bottom for gasoline (RBOB) arrived without fanfare on Jan. 13, when the prompt futures contract touched a low of $1.2265 per gallon. Since then, the front month has rallied as high as $1.689 per gallon, in effect already bouncing 33% off its low.
Less than two weeks from now, a summer specification contract becomes the prompt month, and it currently fetches a price of about $1.86 per gallon. If that number holds, the RBOB rally will have added more than 57 cents, or about 46.5%, topping the last three “spring” spikes and bettering all but 15 preseason rallies through the years.
In contrast, last year saw a surge of just 26.3% into the driving season and the previous year topped out at 27.6%. Thanks to the big numbers that comprised the big bottoms, the actual price movement ranged from 65.7 cents per gallon to 70.8 cents per gallon, providing plenty of shock value to motorists and marketers alike.
The average rally over the course of futures’ history is a bottom-to-top spike of just over 56%. So if 2015 is an average year, we might expect the top of this preseason futures’ cycle to be around $1.91 per gallon, or about 68 cents per gallon above the January low. If history holds true when the gasoline market is all dressed up with no place to go, a downdraft of about 20% might be in order, targeting a futures’ quote of $1.53 per gallon.
The anticipatory top has occurred as early as March 11 (in 2013) and as late as June 16 (in 2008 and 2009).
Here are some reasons why the top may occur sooner rather than later in the annual version of gasoline déjà vu:
- Crude oil woes. There’s been an impressive midwinter rebound in prices, but a glut is clearly looming in the traditionally price-challenged second quarter. North American crude-oil blends may once again trade at a discount of $5 to $30 per barrel under the global Brent benchmark. Refiners might tell shareholders that gasoline moves with Brent, but cheaper feed translates into cheaper refined products in the United States.
- Summer storage. For most of 2015, the price of summer-specification or lower Reid Vapor Pressure gasoline has fetched a price some 20 to 25 cents per gallon above winter grade. Traders and refiners have stored some of these summer components in anticipation of that significant price surge. EIA doesn’t record how much gasoline in recorded inventories is summer or winter spec, but suffice it to say that there is more summer gasoline parked in tanks in mid-February than any year on record.
- Early refinery work. Actual refinery maintenance this year is relatively flat vs. the five-year average, but most of the January-March work involved “conversion” units, and most specifically catcrackers. Those are the units that manufacture much of the domestic gasoline, and they’ll be back in time for the second quarter, let alone the peak driving season. Most of the April-to-June maintenance is with crude units, and that may further pressure WTI and Brent.
- Ample refinery margins. Almost all U.S. markets saw gasoline prices trade even with or even below crude oil in the typically overzealous selloff that occurs in anticipation of the demand nadir. But those margins have quietly bounced back to where sweet-crude refiners find gasoline selling for $15 per barrel above their feedstock, with some sour-crude plants recording $20 to $25 per barrel for the marquee product. Those are numbers associated with tight supply, as opposed to the current inventory picture that puts gasoline stocks as high as they have been since March 1990. There is motive to manufacture plenty of gasoline.
- Cheap ethanol. Prices for ethanol have moved from 20- to 30-cent per gallon premiums to gasoline to a discount approaching 20 cents per gallon in most markets. The value of RINs—those hard-to-predict Renewable Identification Numbers—have held around 70 cents in 2015, and we’ve seen three major retailers at least experiment with E15. The combination of the price of ethanol and the value of the RINs lowers the finished price of E10 gasoline by about 8 cents per gallon and (hypothetically) by 11 cents per gal for E15, keeping further pressure on the overall motor fuel complex.
Footnote: What might a $1.91-per-gallon futures market mean for U.S. retail prices? OPIS looked back at monthly RBOB futures in the last 10 years and found three months with an average between $1.90-$1.95 per gallon. Average retail prices in those months ranged from $2.54 per gallon to $2.70 per gallon. If street prices peaked at say $2.69 per gallon this spring, it would represent the lowest such peak since 2005.
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