Author: Brynne Kelly
In the preceding weeks, US refinery utilization rates have rebounded from their lows of around 68% to 73.1% last week. The impact of this can be seen in the EIA data for gasoline and distillate product supplied by refiners (yellow-shaded area for gasoline and gray-shaded area for distillate).
However, product supplied data is incomplete without a look at the corresponding inventory levels for both (again, yellow-shaded area for gasoline and gray-shaded area for distillate).
Reductions in products supplied are the counterpoint to inventory levels - and the middleman between them is demand. We know that demand has taken a significant hit, and we know that any recovery in demand will have to reckon with the accumulated supply over-hang. This is the massive unknown that markets must contend with. The unknown we must contend with - will a recovery in demand be more voracious than the supply overhang? The last corollary to gasoline inventories vs gasoline price levels seen today was at the beginning of 2016.
The main difference between 2016 and today is the refinery utilization rate (beginning of 2016 was almost 86% vs 73% as of last week).
So, utilization rates today are over 10% lower than they were in our 2016 corollary year mentioned above, yet gasoline futures rallied last week, closing above early 2016 levels.
Here is where the past might be catching up with the future. Prices across the petroleum complex have staged a rebound in hopes of a recovery in demand. However, fundamental data points regarding supply, production and inventory do not necessarily support such a recovery. So are we looking at a false start?
Prices, not Fundamentals, leading the way
If we were "back-testing" today's levels against history, history would imply that futures prices have gotten ahead of themselves. Again, we turn to 2016 for 'comps' when comparing WTI month one futures prices to utilization rates. WTI prices today are at or higher than levels seen at much higher refiner utilization rates.
We present this information to highlight that market prices may have moved faster than fundamental data. In fact, prices have recovered to a point where there is almost zero room for error in future EIA data. Historically, price action can't be taken in a vacuum, no matter how strong technical indicators may be. Relationships across the complex are interdependent and can't be ignored. It's the reason that weekly changes in oil inventories are only relevant if they imply a trend towards a change in future conditions. For example, persistent builds or draws in Cushing inventory have often been used as a bull/bear indicators for oil prices.
Despite the large builds seen at Cushing since mid-March, overall inventory levels in the US have not yet surpassed those seen in 2016 and 2017. This is the only glimmer of hope in the market, which means very little when you factor in the record levels of gasoline and distillate inventory.
The Time for Spreads
Instead of looking at outright oil prices, it may be more productive to focus on spread relationships. For example, given the above data regarding gasoline and distillate inventories and product supplied, it's no surprise that the spread between RB and HO has rebounded in favor of RB. In fact, RB/HO spreads have reached their highest levels in two years. This is a fair vote in favor of a recovery in gasoline demand with a nod towards excessive distillate inventories. It also, however, points to how bearish distillate inventory levels are. One could argue that the wider this spread gets in advance of any real gasoline demand recovery, the more bearish the overall complex (i.e. distillate inventories are at levels that will take years to reduce).
One of the most popular spreads traded out there at the moment is the 12-month spread between December 2020 and December 2021. On a US$/bbl basis, we can see the collapse in the gasoline spread and the subsequent recovery (pink line).
An Unknown Unknown - Demand
But is the recovery in the relative value of gasoline spreads vs crude oil and distillate sustainable? It seems premature given the above-mentioned inventory levels absent future evidence of gasoline demand recovery. There is also the issue of jet fuel demand. While local areas are relaxing their stay-at-home orders and slowly allowing people to go back to work, there isn't much clarity on when air travel will resume. Consequently, jet fuel prices are still depressed (purple line below). Once a leader in the complex, jet fuel prices are still displaying much weakness which makes it difficult for the recent rally in oil prices to sustain.
There really isn't a fundamental leader right now, despite production and refinery run cuts. The market is excited about the return of demand, just as we are all excited to return to some sense of normalcy. However, we cannot ignore the scars left by the past few months. Expect prices to take a backseat while we look for evidence of real demand.
Inventory Recap
Weekly Changes
The EIA reported a total inventory BUILD of 10.4 million barrels for the week ending June 5, 2020. Once again, Cushing inventories posted a draw and the US Strategic Petroleum Reserve posted a build (movement FROM Cushing TO the US Gulf Coast).
Year-to-date, this bring us to a Total Inventory BUILD of a record 165.90 million barrels. We continue to surpass all previous year-to-date builds.
Commercial Inventory levels (ex-SPR) compared to prior years for the same week ending in prior years are all at record highs except those at Cushing.
Lee Taylor - Technical Levels
BRENT
Resistance: 45.18 / 45.98 / 48.40
Support: 37.24 / 36.40 / 32.91
The Brent market also narrowed the gaps left by the Corona pandemic. On the weekly and continuation charts, we have a gap from 43.41 to 45.18 and on the August charts it is slighter wider between 43.41 to 45.98. Aug/Sep Brent seems a little toppy as a move back to -.50 is likely, unless it can muster a break above -.18.
WTI
Resistance: 41.05 / 41.88 / 42.17
Support: 35.18/ 34.00 / 33.10
West Texas Intermediate tried in vain on Monday to close the gap; however, it retraced for the balance of the week. The weekly charts still have a gap of 40.44 - 41.05 which now seems so far away. Solid foundation below the market from 35.18 down to 34.00 – should see plenty of buying in that area. Unfortunately, there has not been a great deal of activity with regards to front month WTI spreads. July/August WTI is trading near the bottom of the range as I still expect a move back to flat.
RBOB
Resistance: 1.1818 / 1.2331 / 1.2942
Support: 1.0911 / 1.0741 / 1.0443
As we have discussed, the gasoline market seemed overbought based upon the RSI but that corrected itself with Thursday’s sell-off. RBOB spreads are entering levels of support like Sep/Oct nearing the 750 level and July/Sep nearing the -150 target area.
HEATING OIL
Resistance: 1.1384 / 1.1884 / 1.2300
Support: 1.1159 / 11068 / 1.0611
July Heating Oil has been leading the energy complex over the last week, but as I have been stating, it was completely oversold during the pandemic. Heating Oil still has a long road to fill in the gaps left and now needs to hold 1.0611 after last week’s sell off. Let us be honest, July heating oil will remain under pressure until it settles above 1.2300, the 50% retracement of the last move down from late February. We have been bullish July/August and still maintain that outlook, but it now needs to hold -235 to formulate a move up at -166.
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