It was a day of two halves for the oil market as morning strength gave way to an afternoon sell-off. The two leading crude markers initially rallied to fresh multi-year peaks on the back of tightening fundamentals. Yet these new heights prompted some market players to put money in the bank, which in turn sent prices into reverse. Alongside the bout of profit-taking, selling pressures were fuelled by the dwindling prospect of a colder-than-expected winter. The National Oceanic and Atmospheric Administration suggested that winter weather in much of the US is expected to be warmer than average. All the while, the energy complex also took its cues from a pullback in Chinese coal and gas prices amid fresh hints that Beijing might intervene to cool energy markets.
Brent ended the day $1.21/bbl lower at $84.61/bbl while WTI shed 92 cts/bbl to finish the session at $82.50/bbl. Nevertheless, the near-term oil price outlook remains constructive. Echoing this sentiment is UBS which sees Brent at $90/bbl in December and March before levelling off to $85/bbl for the rest of 2022. Furthermore, Barclays said that European gas prices could remain high through 1Q22, which in turn will support oil demand. The bullish narrative on the oil market remains intact.
Go Go Gasoline
The US driving season may be in the rear-view mirror, but America’s gasoline demand appears to be experiencing an Indian summer. Implied gasoline demand averaged 9.634 mpbd in the week to October 7, the strongest number since the end of July and the highest level for this time of year since 2007. This suggests that more Americans are filling up their gasoline tanks as they return to the workplace and take more leisure trips.
What makes this all the more impressive is that it comes against a backdrop of rising prices at the pumps. US retail prices for gasoline typically fall in the year-end period. Yet in this instance, they are hitting new highs on the back of increasing crude oil prices. The national average of retail gasoline price was at $3.41/gal this week, according to the EIA, more than a $1/gal higher than a year ago and the highest price at any time since 2014.
All the while, seasonal refinery maintenance is trimming runs. Together with unusually robust gasoline demand, this is putting downward pressure on domestic inventories. US gasoline stocks plunged by more than 5 million barrels last week to 218 million bbls. Stockpiles of the motor fuel are now at their lowest since November 2019 and 3.2% below the five-year average.
Overall lower inventories have contributed to increasing gasoline crack spreads. The ICE New York Harbor RBOB crack versus ICE Brent climbed to $17/bbl in yesterday’s trading. This compares favourably to less than $14/bbl at the start of this month and around $6/bbl this time in 2019. What’s more, broader refinery margins have also seen significant strength in recent weeks.Underscoring these gains is the 3-2-1 crack spread, which is currently trading at more than $18/bbl, compared with around $9/bbl a year ago.
Yet like all good things, the Indian summer that US gasoline has been enjoying is set to come to an end. US implied gasoline demand is already back at pre-Covid levels, which points to limited further upside. To be sure, we will see a seasonal slowdown in gasoline demand over the coming weeks. Unfortunately for US motorists, this will not translate into lower gasoline prices. The fact is that drivers will not be finding relief at the pump any time soon. A widening supply deficit will continue to keep upward pressure on crude prices in the year-end period. And with oil prices set to remain elevated, fuel prices will follow suit. The EIA said earlier this month that gasoline prices will remain above the psychologically important $3/gal threshold on a national average through the end of the year.
This spells bad news for American drivers and the White House alike. The latter is fretting over rising fuel prices, so much so that it has been pushing the OPEC+ group to boost output. Such efforts have been found wanting and the Biden administration has since said it is looking at every means to lower gas prices. In truth, though, it has few options at its disposal. Gasoline prices will therefore remain elevated in tandem with higher crude oil costs. And as US demand softens, inventories are expected to swing higher, which in turn should contribute to decreasing gasoline crack spreads. The US gasoline complex is enjoying an unexpected autumnal revival, but it is only a matter of time before bearish signals emerge.