May 26, 2020

Traders are coming back to the desk after a long weekend and momentum in the futures markets as crude oil and refined products have been up in each of the past four weeks with the week shaping up to see more of the same.

While there is momentum there is some concern that the price rally is running out of steam. Over the latter part of last week volumes started to thin out and open interest is starting to fade, particularly in the WTI futures contract.

Flat prices had another solid week from both a percentage and flat price gain with WTI leading the charge, picking up 13% or $3.82 over the course of the week. Brent gains were a little more than $2.50 week on week or 8%. RBOB and ULSD picked up around 7% each.

The larger WTI gains over the past couple of weeks have narrowed the spread between WTI and Brent to inside of $2 to $1.88 based on settlements. A sub-$2 spread has happened at times in 2020, but it is not something that has been particularly consistent, but in mid-March the spread between May WTI and May Brent was close to $1 apart.

The spread between WTI and Brent has potential to narrow even more. European crack spreads are reportedly weak and that should limit crude oil demand. In the US, barrels are coming out of Cushing and refining margins are recovering as the RBOB crack spread versus WTI on the screen has been consistently above $10/bbl. That is still less than half of what it was last year, considering where the paper crack spread was less than two months ago it has been a solid comeback. WTI futures are likely to continue to find support from another anticipated draw from Cushing inventories as the weaker contango limits the motivation to find storage. Additionally, US shut-ins continue to ramp up.

On the other side of the equation are some of the market mechanisms. Of course, WTI continues to rally but volumes are getting lighter. Over the past five sessions only once (Monday May 18th) did total volumes top 1 million contracts.

At the same time open interest is deflating. Through Thursday - Friday's data will be available later this morning - total WTI open interest stood at 2,144,464 contracts, the lowest in about two months. It is also an indication that a potentially significant chunk of the rally was due to short-covering.

Oil does have some technical strength behind it. WTI is running ahead of the short-term daily moving averages and is closing in on the 100-day moving average. On the other hand, some of the momentum indicators point to WTI being overbought.

WTI reached highs last week of $34.66/bbl while Brent topped out near $37/bbl.

A breach of those levels could take both contracts toward some of the more significant resistance levels. A push past those highs may get Brent enough momentum to move toward $40/bbl and WTI into the pper $30s.

Refined products saw a steady march higher with flat price gains of just over 6cts/gal for both contract and percentage gains either side of 7%. RBOB gains were a tad better at 6.8cts/gal as the gasoline market continued to show strength on improving demand. The upward momentum may have hit a bit of a bump as inventories increased in the latest EIA report. With the RBOB futures contracting pricing higher than ULSD, also the case in multiple spot markets, refiners are likely shifting the yield toward more gasoline production at the expense of diesel. If demand hits a wall this could push gasoline inventories higher once again.

Gasoline demand continues to recover, according to OPIS data from a survey of 15,000 stations, same store fuel sales are up 32% from the demand trough seen in early April. The EIA calculates gasoline demand up 34% from its lows.

However, there are still significant year on year deficits for gasoline. There is hope that heavy travel over the Memorial Day weekend will goose demand higher and continue the market's trajectory. Even if there is a jump in gasoline demand, the chance of a recovery toward previous years levels is far-fetched at best.

While WTI open interest is trending lower, RBOB and ULSD open interest have been on the rise the past several sessions. However, volumes have not been particularly inspiring and perhaps another signal that the recent rally that took RBOB toward $1.09/gal last week might also be running out of steam. As RBOB futures have reestablished themselves above $1/gal, East of the Rockies cash markets have not quite made it to $1 yet, while West Coast prices are closing in in $1.20/gal for gasoline.

ULSD futures picked up a little more than 6cts week on week, but the contract still cannot maintain $1 plus levels. Highs for the contract in the early part of last week saw prices approaching $1.03/gal, but those levels gave way as continued hefty builds in distillate supplies continue to push year on year surpluses as well as surpluses to the five-year average higher.

Distillate inventories continue to get heftier even as refiners try to limit output. Refiners may need to reduce distillate output even further as the paper crack spread sees ULSD futures at less than $8/bbl over WTI, while ULSD versus Brent is hovering near $6/bbl.

Other elements to watch:

- July Brent and June refined products expire at the end of the week. Most of the volume has already shifted to the next month and open interest isn't overly high considering the limited amount of trading days, but there is always potential for last minute fireworks leading into expiration.

- Several North American physical crude differentials are narrowing. WTI at Midland has shifted from a premium to a small discount, while the Light Louisiana Sweet premium fell to inside of $2/bbl after being closer to $3/bbl at the beginning of the week.

- Money managers in WTI continue to boost length on a net and outright basis, according to the most recent CFTC data. The managed money book now holds nearly 9 long WTI futures and options contracts for every short. The ratio has not been that wide since mid-December.

- The strong performance in gasoline markets in recent weeks has crimped average rack to retail margins. Although margins have fallen under pressure they still remain slightly higher than this time last year.

- The national average for gasoline is inching back toward $2/gal and on Tuesday morning stood at $1.962/gal, according to AAA. Prices have moved 7.3cts higher and are up almost 20cts from a month ago.



--Reporting by: Denton Cinquegrana,

--Editing by Tom Galatola,

Copyright, Oil Price Information Service