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We Have Entered The Shoulder Months

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

Seasonally, crude oil does not perform very well during the shoulder season, defined in the fall roughly by the end of Labor Day to the end of October. This is a period associated with the end of summer driving season when gasoline demand subsides, but prior to winter when heating demand kicks in.

This dynamic, plus the lower refinery utilization rates reported in the latest EIA inventory report, were enough to push WTI crude oil futures to a sub-$40 settlement at the close of the market on Friday.

Summer Recovery

Since the initial shock of havoc that the pandemic wrought on the market in March/April, the US has made some meaningful progress towards stabilizing the energy complex. As a result, crude and product prices clawed their way off of historical lows in a half-hearted V-shaped recovery. Yet the move hardly resembles the V-shaped recovery we've seen in equity indices.

In fact, as hurricane Laura made landfall, only gasoline line futures (orange line above) were able to briefly come close to a recovery towards pre-March levels, but were quickly rejected lower.

There are two key charts that highlight supply vs demand in US markets. Those two charts are: Distillate Supplied by Refiners vs Distillate inventory and Gasoline Supplied by Refiners vs Gasoline inventory.

Distillate supplied by refiners (on the left, in teal) is now within historical ranges, yet distillate inventories continue to remain at high levels. This suggests supply in excess of demand.

Gasoline supplied by refiners (on the right, in pink) is also now within historical ranges, yet gasoline inventories have been steadily declining. This suggests demand in excess of production.

Gasoline Demand vs Refiners

The quick response by refiners to reduce output (refinery utilization rate, below) led to withdrawals of US gasoline inventories (EIA gasoline inventory, left) even though summer 2020 gasoline demand remained anemic.

We've had two abrupt and significant reductions in refinery utilization already this year. The 'big one' in March and then again in August due to hurricane Laura. Prior to the arrival of Laura, refiners were steadily increasing capacity utilization but were forced to back down ahead of the storm (from 82% utilization down to 76.7% as of week ending 8/28/2020). The most constructive theme for the market had been that gasoline inventories were able to decline in the face of increasing refinery output, suggesting that daily gasoline demand was in excess of US production.

Oil Demand vs Refiners

Looking at US commercial crude oil inventories by year (left, black line =2020)

it was clear that the uptick in refiner utilization, combined with lower US oil production, was finally leading to inventory withdrawals, which were being used to meet the increased refinery demand.

Crude oil input to refiners (shown on the right) obviously follows that of refinery utilization rates. Lower refining throughput leads to lower oil demand.

Too Soon For Winter

That brings us to US ULSD inventory. This is the market's Achilles heel. There has been little change in distillate inventories since the initial spike in April. We are now seasonally at least a month or two away from winter heating demand, which typically helps to draw down summer distillate builds. This is one of the biggest unknowns the market faces: What will Q4 distillate demand look like and will it be enough to clear out excess inventory? This is crucial in order for refiners to resume bringing capacity online.

As a result, distillate margins have collapsed. Not just in the short-term, but for the next calendar year. Below we see the 12-month (one year) continuous gasoline and distillate futures crack spreads to WTI crude oil futures.

Since gasoline margins impact overall refining margins greater than distillate margins, we combine the two spreads above into a 3:2:1 crack spread (blue line below) which approximates the product yield at a typical U.S. refinery. Three barrels of oil yields two barrels of gasoline and one barrel of distillate.

Either way you look at it, refining margins, as expressed by futures for the next 12 months, do not paint an optimist picture. In fact the 12-month continuous crack spread is hovering just above $10. Prior to the pandemic, we had not seen spreads this low since 2016. This means that not only are refiners facing reduced overall revenue while operating at lower capacity, they are also dealing with historically lower margins for what they ARE producing for the foreseeable future.

Zooming in on the above chart, we see the performance of the 12-month WTI futures strip (black line) relative to the refining crack (blue line) over the last year. A recovery in the crack spread at the end of April, beginning of May helped to pull oil futures higher. But, as the crack spread began to stall at the $10 level in August, it appeared as though oil prices were getting ahead of themselves and needed to move lower.

As a result, the spread between gasoline and distillate during these transition months has been volatile, and ultimately favored gasoline where the only signs of demand in excess of supply have translated to inventory draws. Monthly gasoline/distillate spreads have been on the rise with gasoline futures gaining on distillate futures.

Given the gasoline vs distillate production and inventory balances that we have highlighted throughout, it's not a surprise to see gasoline futures gain value relative to distillate. But we are now entering what is commonly know as the fall 'shoulder months', that time of year when summer gasoline peak demand comes to an end and winter distillate demand has not yet begun. This is not typically a time when gasoline prices lead the market, rather it's a time of transition. We expect prices, specifically oil prices to falter during this time as the market awaits signals regarding winter distillate demand.

Side Note: Saudi Arabia sets October Official Selling Prices

On September 5, Saudi Arabia announced it's Official Selling Prices (OSP) for October crude oil. Looking at prices for it's Arab Light crude oil OSP's on a year-to-date basis, Saudi Arabia will have lowered their sales prices for Arab Light in total by -$4.50 to Asia (vs the Oman/Dubai benchmark) and by -$2.30 to the US (vs the ASCI benchmark) through October. Looking at a chart of month-2 Dubai and WTI continuous financial futures, we see that the disparity in monthly selling prices between the two have not really had much of an impact on the difference between Dubai and WTI prices.

EIA Inventory Statistics

Weekly Changes

The EIA reported a total petroleum inventory DRAW of 16.60_million barrels for the week ending August 28, 2020! Commercial Crude oil inventories posted a weekly DRAW of 9.30.

Year-to-date, total Inventory additions stand at a BUILD of 102.30 million barrels (vs 118.90 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 now generally within 5-year ranges with the exception of distillate inventories.


Lee Taylor - Technical Levels (to return next week)


Resistance: 43.26 / 44.89 / 48.82

Support: 41.24 / 40.12 / 39.26

The Brent market will need to hold 39.63-39.26 area to make sure it does not follow WTI’s recent lead. In my opinion, the WTI and Brent markets are oversold and would need to settle here for a bit before a bigger move south can be had. The longer Nov/Dec Brent stays below -.48 to -.52, the bolder new shorts will act. If Nov/Dec Brent settles below -.59, look for a quick move down to -.71.


Resistance: 41.17 / 42.23 / 43.09

Support: 38.72 / 37.58 / 36.08

It is nice to be back after technical difficulties kept me on ice last week. If only I had been kept on ice the prior week, I would not have shown a moment of weakness and fallen for a bullish sentiment. Let us be honest, the market never settled above the 43.09 on the weekly charts and that was a tell-tale sign. The crude market now seems poised for a move down to 37.58 then 36.00. To have major moves in the crude market we will need a break of either 43.09 on the upside or 36.11. The market does seem quite oversold now (RSI at 30) so I cannot envision a move and follow through to the downside. Nov/Dec WTI sure seems to be oversold here at the -47 level, a settle under projects to -60, but if it can hold we will look for -30.


Resistance: 1.1893 / 1.2104 / 1.2391

Support: 1.1462 / 1.1339 / 1.0999

As we have discussed, what a difference a couple of weeks have made. The October RBOB market was on the verge of breaking above 1.3021 and now it seems primed for a move to 1.0341. There was never a follow through by any commodity in the energy complex. For now, 1.1681 is a key number and I would focus on it during intra-day trading. We are beginning to see a flag formation on the monthly chart with 1.1342 as the low. Oct/Nov RBOB looks primed for a move south and would need to hold 223 to avoid such.


Resistance: 1.1384 / 1.1586 / 1.1848

Support: 1.1183 / 1.0976 / 1.0763

Heating Oil is another market that is oversold, or at least well on its way to being oversold. October Heating Oil needs to hold above 1.1306 to avoid a test of 1.0763. Three weeks ago, the heating oil was on the verge of breaking above 1.3016 but failed and now we are talking about holding 1.13. The heat market on a weekly basis is not as oversold and we eventually will see it test 1.0641. Regarding Oct/Nov heat, it needs to break out of the -170 to -190 range before it goes after the -129 to -228. Enormous support in Dec/March heat between -574 to -562 on a spread that is oversold – take a peek.

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