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Gasoline? The Winter/Summer Handoff Isn't Clear Yet

Author: Brynne Kelly 2/12/2023

WTI ended last week more than $6.50 higher than it began, a reversal of the almost $7.00 selloff in the week prior. A collective sigh of relief for the bulls ensued and a frustrated gasp from the bears was heard

The energy sector had suffered a multi-week liquidation phase from exiting hedge fund bulls capitulating two weeks ago. The market received a nice bid last week after Russia, faced with a sanctions-related drop in demand for its crude oil and fuel products, decided to cut March production by 500,000 barrels per day.

As a result, WTI made a strong run to retake the $80 level, but was not able to penetrate the previous week's high of $80.49. Futures have been actively repelling this level since mid-September of last year, and have eclipsed it on a weekly close only 3 of the last 11 weeks.

We ended the week once again knocking on the $80 door.

WTI Continuous Futures Battle the $80 Level...

Given the extremely healthy Non-Farm Payroll data two Fridays ago and the wind down of what seems to be a mild winter how do we frame this reversal last week?

A nice geopolitical surprise spurred some serious oil short-covering in oil. That is a good start and the flows show more shorts will be likely to buy into strength.

Crude Oil Reacts to Russia

The main catalyst for the rally last week was the announcement from Russia that it is considering a unilateral cut of 500,000 bpd, referencing Deputy Prime Minister Alexander Novak.

This came on the heels of other supportive news earlier in the week:

* Kremlin says those behind Nord Stream blasts must be punished

* Iran Official: Sees Oil Prices Going Up Next Year To About $100/BBL in H2 2023

* Joe Biden Warns China over Threats to US Sovereignty in State of the Union Address - FT

* Turkey’s energy infrastructure has suffered severe damage from the two earthquakes that shook Turkey and neighbor Syria

* Oil Market Faces Production Issue In 2024, Goldman’s Currie Says - BBG

Warning signs for shorts also came from the USGC, which finally received a bid relative to Cushing, suggesting export demand (gold line below).

American Gulf Coast WTI Recovers....

Pieces of The Bull Puzzle

So, we have 'supportive' demand in the US Gulf Coast and now have supply cuts from Russia, and possibly OPEC+. There is one thing we may still need to extend a rally like we had last year. We want Gasoline to take a more demonstrative lead here as the seasons change.

Here's the rationale:

We now are in our last winter-month futures contract of the season, the March contract. Generally as winter nears its end, gasoline markets perk up and take the lead. So far, gasoline hasn't really asserted itself. If it does, that would be the kindling to get this market going solidly above the $80 area again as it did last year.

Distillate demand provided the tailwind that led markets higher ahead of the recent winter's demand season. Crude frequently followed. Distillate has been the bellwether headline story that drove oil prices over the winter months. That all made sense. When Oil longs got nervous, sticky products kept them in usually. We may need that again.

The Same But Different

We head into this summer season with very different dynamics than we had last summer. Last year, people had stimulus money to spend. This year, they are (so far) on their own. Last year the US (alongside other countries) was actively trying to keep winter heating prices lower as the seasonal change came.

To date, we have not heard the same measures being taken to keep gasoline prices lower, other than the obligatory we are fighting inflation rhetoric. Last year the US was releasing unprecedented amounts of crude oil from the SPR. This year they are not.

Crack Spread Leadership

Seasonality drives extended markets. The baton is now being handed off from winter to summer. What 2020 taught us is that refining demand can turn on a dime. When refiners cut their crude runs ahead of the Covid lockdowns, crude prices took a nosedive. Once those refiners came back online, crude oil prices rallied. Since then, crack spreads have been the leader. The sustained rallies have been and/or underpinned by refining. In no small part because refining assets are more constrained than oil producing assets.

Distillate Cracks vs Gasoline Cracks...

Seasonally, gasoline cracks are trying to take-over from distillate. As winter winds down, gasoline demand should be front and center. Distillate, being a lessor produced product with more visibility this past winter, has run the show in the oil complex. This is coming to an end now as all eyes are on gasoline. Consumers don't have stimulus checks in hand this time. Prices have been 'higher for longer'.

Gasoline is the recovery product this time of year. It has so far been reticent to take the lead in this recovery story. But the season is young yet and some pieces are there.

Gasoline Prices Lag Seasonal Rally Patterns...

The dots connect like this ideally: The Russian event caused the short covering rally. Then the potential for knock-on events by OPEC+ keeps shorts from returning is next. Then, 'we'd like to see Gasoline percolate a little before getting comfortable about the next bigger leg through the stubborn $80 area'. Right now momentum and CTA types are not as aggressively adding to length as you'd expect. But they are expected to buy in a flat tape and be aggressive in an up tape. TD Bank notes this:

The weakness in RBOB gasoline prices could evaporate as CTA trend followers are set to notably add to their net length. Strengthening trend signals across energy markets are already likely to support gasoline markets at current prices, but WTI crude will need prices to break [stabilize] $79.50/bbl for the first buying program to ensue, with more notable flow expected above the $82.40/bbl mark.

Taken in combination: the shorts may be licking some wounds, geopolitical volatility may be back, and trend-trading product type funds are likely buyers.

Further, gasoline is beginning to gain ground on distillate.

RB/HO Spread Strength Signals Summer is on the Horizon ...

The Product leadership switch is happening in relative value of gasoline versus distillate. Not only has gasoline overtaken distillate in the last two weeks as shown above, it is also gaining ground there on a yearly basis, albeit later this year than in past years.

Gasoline Retakes the Lead Year/Year vs Distillate...

Gasoline still needs to emerge as a leader for crude oil or absent another Geopolitical shock, it again risks being pushed around by Federal reserve follies.

Goldman Cuts Oil Forecasts on Softer 2023 Demand-Supply Balance

In a bit of a reversal the end of last week, Goldman pushed their bullish price forecast out a bit by saying that oil prices aren't set to recover until the end of 2023. This further complicates the bullish narrative for gasoline this summer. It implies weak demand from refiners.

We saw this in crude oil spreads as their rally was a bit muted in last week's Russian inspired rally.

Supply/Demand Recovery Pushed To Later in 2023

Bottom Line:

Headline risk drove oil prices higher last week, no doubt. More of that will force the next leg we'd expect. It is also not unreasonable that what Russia has cut, OPEC will not put back in this time given the shifting geopolitical sands. But winter leadership is all but gone now. There is only one contact left for that season. The 'Summer/Winter' handoff hasn't strongly manifested yet. If it does, the stubborn $80 area will likely be breached and repelled higher finally. If Gasoline does not take charge doesn't, the chances of a continuation diminish somewhat.


EIA Inventory Recap - Week Ending 2/03/2023

Weekly Changes

The EIA reported a total petroleum inventory BUILD of 10.30 for the week ending February 3 27, 2023. Of this, Commercial inventories posted a small weekly BUILD of 2.40 while SPR inventories were flat on the week.

YTD Changes

YTD total petroleum EIA inventory changes show a BUILD of 52.30 through the week ending February 3, 2023.

Inventory Levels

Both Distillate and Gasoline inventory levels hover at the low end of their 5-year average for this time of year while US Commercial Crude inventories continue to exceed its 5-year average.


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