COLUMN-Will RBOB run off a cliff again?-Campbell

Tue Mar 27, 2012 10:49am EDT

By Robert Campbell

NEW YORK, March 27 (Reuters) - RBOB gasoline futures are on a tear, spurred by bullish bets that a huge cull of Atlantic basin refineries will tighten supply even as all signs point to continued deterioration in U.S. gasoline demand.

Barring a major refinery problem the easy profit from this trade has been extracted. Since the start of the year RBOB gasoline futures are up more than 27 percent, outstripping a 17 percent gain in Brent crude oil.

The outperformance against heating oil, long the market bellwether, is even more striking: since January 1, U.S. heating oil futures are up less than 10 percent.

Yet diesel remains the leader in oil demand growth while gasoline is giving up market share globally, and in former fortress gasoline markets like the United States, consumption is actually shrinking even as the economy grows.

Little wonder bears are wondering when RBOB will have its Wile E. Coyote moment and fall sharply after realizing it has run off the cliff.

However the old adage that the market can be wrong longer than a trader can stay solvent still holds true.

Last year's record suggests that RBOB still has room to keep outperforming crude even before a sharp pullback.

RBOB currently stands at an $18-a-barrel premium to Brent, well below the $24 premium touched last May right before the gasoline market collapsed.

Yet clearly the risks are mounting. U.S. gasoline demand is weaker than last year as high prices bite into consumption patterns even as unemployment subsides.

Even if the U.S. Energy Information Administration is overstating the extent of the decline in gasoline demand in its weekly reports, the more accurate monthly data due this week are almost certain to confirm that gasoline demand again fell in January.

Gasoline inventories hardly look tight either. At just under 227,000 barrels last week, U.S. stocks were 7 million barrels above the level they were a year ago.

Factor in softer demand and the stock cushion is greater.

Nor does gasoline demand in Mexico or Brazil, two of the biggest buyers of U.S. gasoline exports, look set to grow sharply.

Brazil's sugar crop looks better than last year, which points to a better ethanol supply and slower gasoline demand growth.

Meanwhile Mexican gasoline production was at its highest level in 11 months in February while gasoline imports were their lowest since January 2010.

SUPPLY RESPONSE

Yet all the demand issues are being eclipsed by optimism over reduced supply. This optimism may well be misplaced.

Already there are signs of a supply response building on the U.S. Gulf Coast, where complex refiners are bidding up sweet crude oil to maximize gasoline output and capture high margins.

Similarly, gasoline cracks in Europe have risen sharply prompting refiners there to step up output in anticipating of exporting it to the United States.

These same high margins are tempting investors to try and resurrect some of the zombie refineries that have shut down recently. Bidders have emerged for every single refinery owned by Swiss independent Petroplus, for instance.

Another potential survivor is Sunoco's 335,000-barrels-per-day Philadelphia refinery.

Although the company has not given any hint that a sale may happen before the July closure deadline, it seems more likely than before given the improved competitive position of the Philadelphia plant since its two neighbors shut down.

Indeed the case could be made that only three gasoline-making refineries --Hovensa in the U.S. Virgin Islands, and Trainer and Marcus Hook on the U.S. East Coast-- may be shut down in time to have an impact on the summer gasoline market.

(Valero's Aruba refinery is also closing down but this plant makes little in the way of finished gasoline).

If the supply-side of the equation turns out to be less tight than traders are hoping, a demand surprise will be the only thing left to support the gasoline market.

But with demand in the United States under heavy pressure at current prices it seems hard to believe that the gasoline consumer will return in enough strength to sustain current price levels if the supply picture is better.

That leads to more questions about the overall health of the oil market. Clearly geopolitical tensions have fed into oil prices, but support is also coming from gasoline.

In fact, it would seem that relative weakness in global diesel prices is, if anything, dragging on crude prices.

That suggests if gasoline goes off a cliff this summer the main short-term physical support to crude prices may be lost.

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