An active tropical weather season is ramping to its peak with two storms packing a punch for the Gulf Coast this week.
The first to hit is Tropical Storm Marco, which is forecast to weaken and is moving toward Louisiana and that will be impacting the market at the beginning of the week and Tropical Storm Laura by the middle of the week. The forecast track for Marco now sees it skirting along the Gulf Coast. While Laura is still a tropical storm it is expected to reach hurricane status after strengthening over the Gulf of Mexico and impact the Gulf Coast in the middle of the week.
According to a Sunday afternoon update from the Bureau of Safety and Environmental Enforcement just under 58% of Gulf of Mexico production is shut in with just 1.065 million b/d currently shut in. As of the most recent update, 114 platforms have been evacuated or just under 18%.
Futures markets popped on Sunday evening with RBOB seeing the bigger impact. Initial September trades were above $1.30/gal and that pushes prices to a level that has not been breached for RBOB since late June. While front month RBOB futures were above $1.30/gal earlier Monday morning, the gains initially narrowed.
However, what may be a bit misleading about RBOB and ULSD futures is most of the activity has already shifted to the October contract with September losing relevance as open interest dwindles. An example of that was seen during Sunday evening trading where the September gains were near 4cts/gal, October was barely up 2cts/gal. The lack of liquidity and dwindling open interest in September could leave the contract susceptible to some significant swings this week. The September/October spread in RBOB has been relatively narrow (7.11cts based on Friday's settlements) while previous years have commonly seen double digit differences.
While storms typically have more of an impact on demand, Marco and Laura have refineries in the current path. As it currently stands, Louisiana refineries are most likely to be impacted. OPIS estimates that there are 10 refineries
that are in Hurricane Marco's path with capacity of just shy of 2.5 million b/d.
RBOB is picking up where it left off after more week on week gains marking the third consecutive week of gains after picking up nearly 4cts week on week. Aiding RBOB last week was a decline in gasoline inventories, with total U.S. supplies falling to some of the lowest levels mid-March.
Demand remains well below year ago levels, but pockets of strength are met with some weak off-setting areas. Also adding to the concerns for gasoline demand is the upcoming end to the summer driving season on the shift in RVP specifications. Gulf Coast spot market gasoline is going through such a shift today.
While almost 60% of the Gulf of Mexico oil production is shut in, WTI futures had a somewhat muted response to the storms as refinery shutdowns would reduce demand.
A mixed week for crude oil saw October WTI close the week only about $2 below Brent as the roll from September to October helped WTI secure a nominal week on week gain of a little more than 30cts while Brent was off by 45cts.
WTI futures with the shift to October has also helped keep the range to the upper end with the contract finally getting past $43 last week, but just 59cts separated the highest and lowest settles last week for WTI futures. Brent on the other hand did start last week with an eye on the $46 level but faltered by the end of the week with Friday's $44.35/bbl settle the lowest in about three weeks.
Although Brent was trending lower during the week, both it and WTI still have some technical strength propping the contract up as support levels are still said to be a few dollars away. If there are widespread refinery shutdowns that last for perhaps more than a couple of days, the potential for crude oil inventories to start ramping up and put downward pressure on prices.
The late week pullback did push WTI below some of the short-term daily moving averages, but WTI remains above some of the longer-term moving averages. While there have been times where it looked like oil prices were ready to break down, they have made a strong comeback to challenge resistance. WTI is more than likely to remain rangebound unless it can push past the multi-month high of $43.58/bbl.
Crude oil supplies have been trending more bullishly in recent weeks. While last week's draw for crude oil was the fourth consecutive one it was the smallest of the four straight draws. Nevertheless U.S. crude oil inventories
have dropped by more than 24 million bbl over those past four weeks and U.S. totals are at a four-month low.
The ULSD contract is considered the weakest of the petroleum complex. Prices fell last week by a little over 3cts and Friday's September settlement of $1.208/gal was the lowest front month settlement since July 1st. Refinery
shutdowns would in the short-term offers some support for the futures contract, but it may be short lived. While RBOB moved higher Sunday evening the move higher for ULSD futures was only about half the move for RBOB.
Distillate inventories remain sky high and while the most recent EIA report showed a small build total U.S. stocks are more then 30 million bbl ahead of the five-year average. Total distillate inventories have been north of the five
year average for the past 13 weeks. The East Coast and central Atlantic in particular hold a significant amount on storage tanks and the oversupply of ULSD in PADD 1b storage tanks could ultimately have an impact on ULSD futures.
Other elements to watch:
- While most traders will keep a close eye on storm developments, one thing to keep in mind that any supply and/or demand impacts will not be seen in this week's EIA inventory report. There is a chance some import and export figures were impacted. However, gasoline demand and overall supplies will continue to be closely watched.
- Data released late Friday afternoon from the Commodity Futures Trading Commission shows that funds have been pulling back on their WTI exposure and at the same time focusing on refined products. Money managers as of August 18th had a net long bias in ULSD futures and options for the first time in some seven months.
- The Dollar may have reached a bottom after a sharp rally helped the Greenback on Friday. From a technical standpoint, this week can go a long way in determining if the dollar has indeed bottomed or was just seeing a minor correction.
- The gasoline crack spread on the screen has been showing some strength of late moving toward $12/bbl versus WTI. ULSD though has been trending in the opposite direction with some of the lowest paper crack spreads in more than two months.
- Impacts on refineries would indeed push retail gasoline prices higher. That is not evident as the national average is relatively flat at $2.189/gal, up about a penny week on week, according to AAA.