Gasoline futures traded on the New York Mercantile Exchange are down nearly 30% from their June high to Oct. 10, and possibly more stunning have erased 19.3% of their value in 11 days from the late September high while the U.S. retail average for gasoline is down 1.6% from Sept. 29 to Oct. 6. Get ready for the pace of decline in retail prices to accelerate.
Moreover, the bear market that has laid siege on the crude market has upended expectations that global oil prices would be tethered to near $100 bbl, with the IntercontinentalExchange Brent crude futures contract already sinking below $90 bbl, as Saudi Arabia surprised many in the market. The recipe positions the U.S. retail average to break below $3 gallon, which would be the first time it breached the psychological benchmark since the end of 2010.
Saudi Arabia’s recent decision to slash prices for the crudes it sells instead of cutting production to slow the growing glut of oil supply signaled the de facto leader (due to its unique position as swing producer) of the Organization of the Petroleum Exporting Countries will look to save market share instead of supporting global oil prices near $100 bbl.
The oil market was already under pressure from weakening economies, especially in the euro zone where recession is coming closer to reality, while China’s economy slows. The U.S. economy is stronger than many had expected, but is seen vulnerable to a slower growth pace as other major world economies and trading partners struggle.
Slowing economic growth or outright contraction shrinks global demand for oil, with the Energy Information Administration last week downgrading their outlook for world oil consumption by 83,000 bpd to 91.469 million bpd for this year and by 182,000 bpd in 2015 to 92.706 million bpd.
The slowing demand is coming just as rapid growth in US oil production is being felt globally, having already cut to near zero U.S. imports from West Africa from 2.5 million bpd in January 2008. Extra oil supply from Libya, which ramped up output a sharp 500,000 bpd over the summer to roughly 800,000 to 900,000 bpd, further balloons the glut in oil supply.
The relatively quick change in sentiment also comes as geopolitical threats to the supply of oil ease. In the case of the Ukraine crisis, affected demand has eroded with the adverse implications for the regional markets. Consider speculators held record length in the NYMEX West Texas Intermediate crude futures contract of 458,969 contracts on June 23, and have since cut that position 36% to a 15-month low at 293,683 contracts on Oct. 7.
The NYMEX Reformulated Blendstock for Oxygenate Blending futures contract is down 92.53cts or 29.4% from the 2014 high of $3.1520 gallon registered June 23 to Oct. 10’s $2.2267 gallon nearly four-year low. From September’s $2.7577 gallon high set on the 25th, the contract is down 53.1cts or 19.3%.
EIA’s U.S. retail average for all formulations of regular grade gasoline was $3.299 gallon on Oct. 6, an eight-month low, down 5.5cts or 1.6% from the prior week while down 41.4cts or 11.2% from its annual high of $3.713 gallon reached April 28. The retail average should quickly drop below $3.20 gallon, and continue down from there and challenge $3 gallon.
The NYMEX RBOB futures contract should see some support to slow the downturn from spread trades, with the RBOB crack—RBOB minus WTI or Brent crude futures—at a one-year low. Refiners are now moving units into autumn turnarounds for seasonal maintenance, which cuts the demand for crude and the output of gasoline. This triggers sales of crude futures contracts and buying for RBOB futures contracts.
Lower retail gasoline prices could prompt greater demand for the motor transportation fuel, although the year-on-year growth rate has slipped. EIA data shows gasoline supplied to the primary market 65,000 bpd higher so far this year through October 3 than during the comparable timeframe in 2013, down 6,000 bpd from the previous week’s 71,000 bpd growth rate. In its more recent Short-term Energy Outlook released Oct. 7, EIA maintained its expectations U.S. gasoline demand would decline 20,000 bpd from 2013 to 8.82 million bpd this year. EIA downgraded its 2015 outlook, now expecting the consumption rate to slip 20,000 bpd instead of 10,000 bpd.
Consider, too, that gasoline demand during the fourth quarter 2013 looked to have finally gotten its mojo back, repeatedly topping the five-year average as the economy was gaining momentum ahead of the bitter cold weather that gripped much of the nation in the first quarter.
World oil prices could get a bounce as the Islamic State sets its eyes on Baghdad despite weeks of bombings by the US and several allies, deploying guerilla tactics as they make their gains. Nonetheless, led by US production growth in crude oil, at a better-than 28-year high, supply will continue to outpace demand and pressure prices.