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Calendar Spreads Take a Hit While Markets Wait for Winter Demand

Author: Brynne Kelly (w/Lee Taylor technical levels)

Crude oil began this crazy year called 2020 with the 2-year curve structure firmly in backwardation (green line below). By April and May, the curve gradually flattened out and moved into steep contango (light blue & fuchsia lines below). Now we find ourselves waiting for winter demand to kick in to prop up calendar spreads.

Since the May lows, the overall oil market found some stability and the WTI curve structure has flattened out a bit - with flat price moving successively higher from May through September 1 settlement (fuchsia line vs purple line above). In fact, as of September 1, the overall curve was within spitting distance of where the curve was at the beginning of March (cyan line above). This was in reaction to production cuts, recovering demand and declining US oil inventories. However, by the close of business on Friday, September 11, the market had pulled back and contango began to steepen (black line above).

Accordingly, US Commercial crude oil inventories peaked during week ending June 19, 2020 at 540.70 million barrels and then drawing down to 498.40 million barrels in the week ending August 28. This trend of weekly declines in oil inventories came to an end by the September 4 EIA inventory report.

This was not a big surprise as refinery utilization rates continued lower as a result of hurricane Laura, seasonal maintenance and tepid refining margins that reduce the incentive for refiners to quickly return to full operations (black line below). We have also now entered refinery outage season with refinery outages for planned work and upgrading expected to average 4.06 million b/d in September and 3.86 million b/d in October, according to Platts Analytics data.

Lower refinery utilization rates result in less crude oil input to refiners (dotted black line below) and, after last week's report, the amount of crude oil input to US refiners approached the May lows.

Combine that with the reported slight uptick in production that hit the market once hurricane Laura passed, and it's no surprise that commercial inventories increased.

This is putting pressure on calendar spreads across the board, starting with one month spreads in WTI (below). This should continue through at least the end of October when refinery maintenance winds down.

However, it will be more of a slow grind lower vs an overnight collapse like we saw earlier this year. The slow grind lower will be on the front month prices that will test the tenacity of US production, while at the same time providing opportunity to those that are able to store oil.

The decline in gasoline and oil inventories since April were enough to pull gasoline and oil spreads like the Dec-20/Dec-21 off their lows. However, there is no denying that the weakest of the three spreads is in the distillate markets (HO, blue line below).

After all, these Dec-20/Dec-21 spreads are a direct reflection of the change in gasoline and distillate inventories seen below (gasoline on the left, distillate on the right).

We have reached that time of year where gasoline tends to take a back seat and winter heating demand pushes distillate markets into a leadership role. In fact, the October-20 spread (cyan line below) is the last month where gasoline is still holding on to a premium over NY ULSD that will last until next summer driving season. This loss of leadership from gasoline markets is problematic for oil prices because it is happening while ULSD inventories are at all time highs and prior to winter heating demand.

There is little optimism in distillate markets at the moment. Prices across the board (Q4 and beyond) have plummeted since the beginning of September.

Bottom line, until we see meaningful draws in distillate inventory levels, there will be pressure on the front of the petroleum complex. Calendar spreads will widen-out, but we do not think they will collapse in the way they did earlier this year. There is slack in the system, but the 'system' is also operating with much more restraint compared to earlier in the year.

EIA Inventory Statistics

Weekly Changes

The EIA reported a total petroleum inventory DRAW of 3.00_million barrels for the week ending September 4, 2020. Commercial Crude oil inventories posted a weekly BUILD of 2.00.

Year-to-date, total Inventory additions stand at a BUILD of 99.30 million barrels (vs 102.30 last week). We have made meaningful progress in drawing down from record levels over the last several weeks.

Commercial Inventory levels of Crude Oil (ex-SPR) and Refined Products are slightly above the 5-year average in oil, slightly within the 5-year average for gasoline and still way above the 5-year average for distillate.


Lee Taylor - Technical Levels


Resistance: 42.06 / 42.91 / 43.76

Support: 39.26 / 36.98 / 34.71

The Brent market did hold 39.63-39.26 area and seems poised to follow WTI’s lead back up. From a flat price perspective, we can see the Brent market trade sideways here as it prepares to move into the low 40s. We need to see November Brent break above 42.91 to get extremely bullish. A break and settle under $39.26 in November Brent would make me reevaluate any length I have. The longer Nov/Dec Brent stays below -.48 to -.52 the bolder new shorts will act. I stated last week that the longer Nov/Dec Brent stays below -.59 the better chance of reaching our objective of -.71.


Resistance: 39.03 / 39.94 / 40.86

Support: 36.08 / 34.81 / 33.10

The market is now oversold and will have a difficult time breaking under 36.08-36.00 level.I was a little surprised in the speed with which it sold off last week – let me reiterate, not that we sold off but how quickly.$36.08 is the 50% retracement level of major move down from early January to the lows placed in late April.There will be plenty of resistance levels as the market tries to breach $40 again with 39.03 then 39.94.Oct/Nov and Nov/Dec WTI seem to have bottomed here and as long as they can stay above -30 and -47 respectively.


Resistance: 1.1681 / 1.1893 / 1.2391

Support: 1.0865/ 1.0641 / 1.0341

The impending storm hitting the Gulf of Mexico may alter the gasoline market short term. Gasoline acted much better than the rest of the energy complex last week but will desperately need to hold 1.0854 this week. On the upside, October RBOB would have to settle above 1.1681 for a retest of the 1.30's. Look at Dec/March RBOB as it has formed a massive base near the -500 level. Look to accumulate length from 450 down to 500.


Resistance: 1.1296 / 1.1476 / 1.1746

Support: 1.0763/ 1.0612 / 1.0431

The heating oil market did prove us right once it failed at 1.1306 and quickly it went to 1.0763. October heating oil will need to hold 1.0763 this week as it tries to form a base here to which it can build from. Heating oil spreads are beginning to appear as the buy of the month. We have been watching Oct/Nov and it broke above 170 on its way to 128 and Dec/March breaking above -500 to -445 then -396.

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