By Robert Campbell
NEW YORK, March 27 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
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
Brazil's sugar crop looks better than last year, which
points to a better ethanol supply and slower gasoline demand
Meanwhile Mexican gasoline production was at its highest
level in 11 months in February while gasoline imports were their
lowest since January 2010.
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.