By Robert Campbell
NEW YORK, Sept 28 Get ready for a lot more
volatility in gasoline and diesel prices. Low inventories and
lots of open interest in the futures contracts portend further
short squeezes, particularly if autumn refinery maintenance
tightens supplies further.
This week's massacre of shorts on the RBOB gasoline futures
contract is only a warning. A repeat of the situation in
gasoline next month cannot be ruled out. And the scene is being
set for brutal squeezes on distillate fuel.
Refined product stocks on the U.S. East Coast (PADD 1) are
tight, but the situation is far worse in the five states of the
Central Atlantic sub-region (known as PADD 1B) where the New
York Harbor, the delivery point for U.S. refined product
futures, is located.
Gasoline stocks in PADD 1B last week were 23 percent below
the 2007-11 average for this time of year and, in fact, were the
lowest since records started being kept in November 1990, at
fewer than 21.5 million barrels.
Little surprise then that physical players turned with a
vengeance on the shorts in the RBOB contract this week.
Between Monday and Thursday the October RBOB contract
rallied more than 20 cents per gallon, or nearly 7 percent as
players on the short side of the contract scrambled to exit
With routine maintenance underway throughout the Atlantic
basin, it may be some time before storage tanks in and around
the New York Harbor are replenished. The stage is set for a
repeat of the squeeze in a few weeks.
Despite these risks, there are still a lot of short bets out
there on longer dated contracts.
Open interest on longer-dated RBOB futures has been strong,
but with little evidence that supply is poised to rebound, some
of this activity is undoubtedly speculative.
That leaves the market vulnerable not only to a scramble for
physical supplies but also a stampede of short-covering as
financial players try to get out of losing positions.
It is not only gasoline where anyone going short without an
offseting position is playing with fire.
The situation for distillate fuel in PADD 1B is also ugly.
Although stocks are still above record low levels, current
levels are still 38 percent below the five-year moving average.
Refinery shutdowns in the region are crimping local
supplies, while traditional suppliers of imports in the
Caribbean are also closed.
The decreased use of distillates as a home heating fuel in
the United States may have bred some complacency among traders,
but that is still a risky assumption.
A sudden cold snap can still trigger a spike in demand. With
stocks well below normal levels, a spike in consumer buying
would almost certainly trigger a surge in prices.
Moreover as an import dependent market, the U.S. East Coast
will be in competition with other distillate-short parts of the
world, including Europe, where stocks are also very low.
Despite this situation, short players in the futures market
have been willing to add positions further down the futures
curve. While a lot of this money may be bets on timespreads,
pure long players may be underestimating the opportunity here.
Stubbornly weaker forward refined product prices relative to
crude oil have inhibited fuel output for much of the summer.
(For a related column see )
REFINERY CLOSURES AND LOGISTICS
The heart of the problem lies in recent refinery closures in
the United States. The Philadelphia market lost two refineries
this summer, which undoubtedly contributed to the tightness in
sub-regional gasoline supplies.
The situation was exacerbated by logistical difficulties.
Pipelines and terminals designed to receive fuel from refineries
cannot simply take imports overnight, no matter what the price
Some relief may come this winter from the restart of the
185,000 barrels per day Trainer refinery outside of
Philadelphia, now owned by Delta Air Lines, but this
plant is being modified to produce more jet fuel than before.
But critical sources of distillate fuel in the region,
ranging from the shuttered Marcus Hook refinery, to the Hovensa
plant in the Caribbean, are not coming back.
And in the meantime, the logistical situation remains
challenging. U.S. law prohibits the use of non-U.S. vessels to
carry cargo between American ports, leaving the East Coast
reliant on already strained pipeline networks and foreign
That will leave the big trading firms active in the
distillates market with a huge advantage. The shorts had best be