March 30, 2020

Another week of losses was seen for a majority of the key petroleum contracts with only ULSD able to pull out a week to week gain.

The percentage and outright moves last week were light when compared to each of the previous two weeks but in multiple cases last week there were massive moves. On Monday RBOB lost about a third of its value and spent the rest of the week clawing back toward more nominal losses.

During the most recent week, NYMEX WTI futures lost just 92cts week on week as the contract was aided by the roll from April to May and the contango that the market currently sees. Overall the loss on a percentage basis was just 4%. ICE Brent futures lost $2.05 last week, down 7.5%.

Although oil prices remain depressed, last week seems to have brought with it a little bit of stabilization and more modest movements in prices. For example, only about $4.50-$5 separated the highest and lowest trades last week for both WTI and Brent but the week before it was greater than $10/bbl on both contracts. A few trends last week that gained even more traction and is likely to remain a feature for some time is the widening of the intermonth spreads and some of the discounts that have emerged for physical grades.

As of Friday's settlement, June WTI held a $3.64/bbl premium to May and now more than $10/bbl separates the front month and October WTI contracts. Brent is similar, with just over $3/bbl between the May and June contracts. The May Brent contract expires on Tuesday so the May-June comparison may not be the most relevant. The June-July intermonth spread for Brent is relatively close though at just under $3/bbl.

The widening contango among futures contracts and some weaker prompt physical values all point to a storage play. Cushing barrels as a result hold the premium now and over the coming weeks, the EIA data should include a flood of oil moving into those storage tanks. According to the most recent EIA data, Cushing inventories are at 39.3 million bbl. The all-time high for storage at the hub was just over 69.4 million bbl in early April 2017 and that number is expected to be eclipsed sometime in the 2nd quarter which begins this week.

The value of the Cushing barrel and low refinery demand has led to some widening discounts for various crude grades. For example Light Louisiana Sweet (LLS) late last week was trading at discounts in the area of $5/bbl, putting flat prices in the $17/bbl area.

Other grades are in single digits like Western Canadian Select, with Bakken not far behind. In some of the more extreme cases for the land locked crudes that do not see much attention unless there is some sort of meltdown, posted prices are near zero. The last time something like that took place was in 2016, the last time WTI futures were in the mid $20s.

While other markets were falling, ULSD futures were finding some support and added 6.22cts last week. Although the April contract expires on Tuesday and most of the attention is already on the May contract but unlike crude oil and RBOB there is not much in the intermonth spreads.

Part of the strength in ULSD futures is tied to demand that has up to this point been much better than gasoline. Increased deliveries helped buttress the demand for diesel. However, sources are starting to see some demand destruction creep into the diesel markets.

The stronger move in ULSD should serve as motivation for refiners to shift to more distillate production. The ULSD crack spread versus WTI on the screen is at its highest since the beginning of the year (based on Friday settlements) while the ULSD crack spread against Brent is quickly approaching $20/bbl.

Refiners have already started to tilt the yield to as much distillate as possible as the latest EIA data shows refiners boosting distillate yield toward 30%.

While refiners have moved toward more distillate they have pulled back on gasoline and jet fuel output. Several reports last week noted declines in output of 10-20% at refineries and that has shown in the gasoline yield to 55.3% according to EIA data with the jet fuel yield sliding to just over 8%.Although RBOB was down week on week, due almost entirely to a nearly 20cts loss last Monday, the contract managed to find some traction and bounce off some of the lowest levels this century.

The move in the latter part of the week helped take the RBOB crack spreads on the screen back into positive territory versus WTI after falling to a negative $6/bbl paper crack spread. RBOB is still valued at less than Brent but what was an almost negative crack spread of $10/bbl at the beginning of last week is now inside of minus $1/bbl.

Even though the crack spread on the screen made a strong move in the latter part of the week the contango in crude oil keeps a lid on the upward potential even though RBOB has several cents worth of contango built into the structure as well.

Lower gasoline output should lead to gasoline builds as most believe that the run cuts and yield shift is not enough to balance out the low demand environment the market is currently in.

Other elements to watch:

- Overall futures volumes are shrinking. For example, total ULSD volume on Thursday was the lowest since New Year's Eve. Some of the lower volumes could be lost speculative interest due to the current price environment, however increased margin requirements may have shaken out some weaker players.

- Although there is much talk of benchmark futures contracts sliding into the teens, many grades of crude oil around the world are already there with some in single digits. A futures slide this week could theoretically take some grades below $5/bbl.

- The end of the quarter tomorrow may keep markets from straying too far from where they have been recently. Friday's February payroll report is likely to have some eye-popping numbers and that could have some influence on the market.

- RBOB length continues to exit, according to data from the CFTC. Managed money outright longs are at the lowest level since late August 2017. While the net long bias is the lowest since December 2018.

- Retail gasoline prices begin the week at $2.013/gal, with averages moving below $2/gal within the next day or two. Twenty nine states now have an average price below $2/gal. Oklahoma and Wisconsin see averages that are below $1.60/gal.

 

 

--Reporting by Denton Cinquegrana, dcinquegrana@opisnet.com

--Editing by Tom Galatola, tgalatola@opisnet.com

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