November 11, 2019 | By Denton Cinquegrana

The fourth quarter is not even at the halfway point yet and the rest is likely to be as eventful as the first half.

That is not to say that Q4 2018 wasn’t lively. In fact, the annual high and low for crude oil futures took place just a handful of weeks apart. That is not going to happen in 2019, but there will be plenty of volatility between now and the end of the year.

This morning, for example, crude oil and refined products futures were lower, again pressured by doubts on the progress in trade talks between the U.S. and China, which have markets pessimistic about oil demand.

Last year price volatility was about crude oil finding its highs and lows, while this year products appear to dominate. Total distillate inventories in the U.S. through the fall have been running roughly 10 million to 15 million bbl below the five-year average. Meanwhile, gasoline supplies in aggregate are below 220 million bbl for the first time in nearly two years.

To say prices have been bouncy may be an understatement. Market arbitrage opportunities have suddenly appeared, only to quickly disappear. At the end of October, 23cts/gal separated New York Harbor spot CBOB and the same blendstock in Chicago, suggesting the opportunity to take advantage of new bidirectional service on the Laurel Pipeline. Just five days later, the premium for New York CBOB versus Chicago was only about 10cts.

It appears likely that some of that gap between the two markets’ values will once again emerge. Chicago CBOB prices are once again under pressure and with East Coast gasoline supplies slipping, a return of 20cts-plus differences appears likely.

The gasoline arb also appears to be opening between the Gulf Coast and the New York Harbor as well. For CBOB, the Gulf Coast discount to New York at one point was close to 13cts/gal. Amid backwardation for Gulf Coast CBOB as refinery maintenance wraps up, arbitrage opportunities may arise in the value of line space.

Line space on the Colonial Pipeline Line 1 (gasoline) stands at around 2cts, but if last year is any indication a target closer to 5cts is in the cards for Q4. The same goes for diesel. Space on Colonial’s Line 2 is worth somewhere between 2.5cts to 3.25cts in early November and, like Line 1, could take aim at a Q4 peak somewhere around a nickel.

The accordion-like movement of various markets versus New York Harbor is going to depend on a few factors, such as no huge increases in imports of gasoline or distillate into PADD 1 – particularly the Mid-Atlantic – or a slew of unplanned Gulf Coast refinery outages.

 

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