August 10, 2020

Even with a break above $43 last week for West Texas Intermediate futures to say that WTI is anything other than rangebound would be misleading as the past three weeks have yielded settlements that have ranged just over $2.25.
Last week fell comfortably in that range with Friday's settlement of $41.22/bbl. In fact over the past three weeks the average WTI settlement has been $41.28/bbl as prices refuse to break one way or the other before meeting a
Brent has been behaving similarly with the past three weeks seeing settlements ranging $2.23 with an average settlement of $43.89/bbl. While WTI closed the week just a few pennies below that three-week average, the October Brent settlement of $44.40/bbl is some 50cts higher.
Brent however was aided by the roll from September to October at the beginning of last week. The roll and contango in the market helped front month prices increase by $1.10 week on week. Meanwhile, WTI was up 95cts week on week.
While both benchmarks moved higher the reaction can be considered muted after the EIA has recorded significant draws in each of the past two weeks. There is still a significant surplus to last year and the five year average, but under different circumstances the market might have reacted more bullishly to back to back draws that totaled close to 18 million bbl.
A third week of draws could help push the crude market into an uptrend, but refinery runs are starting to level off as utilization has been just shy of 80% over the past four weeks and with demand concerns ramping up refiners may not be willing to press runs much higher, keeping crude oil demand and in return supply draws at bay this week.
Waterborne movements may also give some clues to the health of the crude oil market. The U.S. has found a bit of a comfort zone of around 3 million b/d. Imports have been a bit more erratic over the past four weeks ranging from
about 5.1-6 million b/d, but even with the high export rate in last week's data U.S. inventories were still down.
The lack of significant price action leaves a little tug-of-war between market bulls and bears. Last week's high of $43.52/bbl should be the first target for market bulls to push WTI futures past to seize momentum. It would appear that market bears have slightly more work to do with recent lows below $40 looking out of reach at the beginning of the week without some bearish headlines to inspire some selling. Momentum indicators also put the market in fairly neutral territory and current prices are mixed versus some of the short and longer term moving averages.
Like WTI, Brent is closer to recent highs than lows and while there is not huge conviction one way or the other, it appears that market bears may have more work to do to push momentum in their favor.
There has been some movement back into the market though as open interest levels are running toward two-month highs. Total open interest is pushing toward 2.1 million contracts after struggling through much of the summer to maintain open interest north of 2 million contracts.
Both RBOB and ULSD were up week on week to varying degrees as the gains for ULSD were a fraction of a penny and RBOB was barely two pennies.
While crude oil inventories are moving lower, product supplies continue to inch higher potentially keeping a lid on prices. In the case of gasoline, the calendar can also keep a lid on prices as the summer driving season is close to
Recent 2nd quarter earnings calls from refiners, retailers and in between note improving gasoline demand, but there are none that see gasoline demand getting back to normal before the calendar flips to 2021. For the remainder of the year, most appear to have circled in on gasoline demand being down 10% year on year. A 10% decline in gasoline demand would keep total demand above 8.35 million b/d. August-December 2019 averaged 9.295 million b/d, so a 10% decline may represent an optimistic view of gasoline demand for the remainder of the
year especially if states have to slow down the reopening of economies and schools continue to opt for virtual learning.
Gasoline production last week was at the highest levels in several months and at 9.3 million b/d total production appears to be higher than demand and that may force refiners to tap the brakes on gasoline output.
Refiners may also want to slow gasoline output not only due to demand concerns, but also paper crack spreads are sliding to some of the lowest levels of the summer. Against WTI, RBOB is not even half of what it was a year ago, with a current paper crack spread at barely $9/bbl. Last year saw the crack spread for RBOB versus WTI narrow throughout the month and if 2020 follows that trend the RBOB crack may be in for much lower numbers.
The RBOB contract is holding above some of the short-term moving averages, but below some of the longer term ones that might help the contract break out. RBOB may need some help from other segments of the petroleum complex though if it is going to test and break through some of the  recent highs.
Although it is moving into season, ULSD futures have not been able to muster much upside. That is due to the oversupply of distillate in U.S. tanks. Overall inventories remain well above the five-year averages and the crack spread versus both WTI and Brent should not inspire much confidence for refiners. ULSD also is below some of the short-term moving averages and while the contract managed to post a gain week-on-week, a loss of more than 4cts over the final two sessions of the week will put market bulls on the defensive early this week.
Other elements to watch:
- Some near-term weakness across the petroleum complex has helped widen the one-year time spreads. For example the spread between September 2020 WTI and September 2021 WTI has widened out the $3.51 based on Friday settlements. This is the widest the spread has been since late May.
- Over the weekend President Trump signed an executive order extending unemployment benefits as well as others as Congress could not reach a deal before those benefits ran out. Markets were generally moving higher on the news with crude oil and refined products up overnight and this morning along with equities in Europe.
- As most grades of crude oil have gotten a lift from futures, Canadian crude oil (more specifically Western Canadian Select) has started to see prices fall as production increases. Discounts for September WCS have moved above $11/bbl and that has sent prices below $30/bbl late last week.
- Product futures are struggling when compared to WTI as the NYMEX 3:2:1 crack spread based on Friday's settlements was $9.67/bbl a little over two month low.
- With most markets in tight ranges, retail gasoline prices have seen little movement. According to AAA, the current retail average price in the U.S. is $2.177/gal, down just over a half-cent week on week and about 2cts below a
month ago.
--Reporting by Denton Cinquegrana,
--Editing by Tom Galatola,

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