MARKET WATCH: RBOB spikes as traders cover short positions

October reformulated stock for oxygenate blending jumped 19.77¢ to finish at $3.34/gal—the highest level since early April—as traders scrambled to cover short positions prior to expiration of that contract at the close of the Sept. 28 session on the New York market.

In an amazing move, the contract soared nearly 30¢/gal near the end of the session. The exact cause of the sudden spike was unclear, but there was speculation of delayed gasoline deliveries in New York harbor, the specified point for physical deliveries. Gasoline stocks are reported to be low on the Atlantic Coast, while some refineries are in seasonal turnaround. However, the November RBOB contract gained only 2.29¢ to $2.92/gal in the same session. Heating oil for October delivery rose 1.21¢ to $3.17/gal.

The front-month US crude contract continued to advance for the second consecutive session but posted a 1% net loss for the week, “building on downward momentum from the previous week, said analysts in the Houston office of Raymond James & Associates Inc. Natural gas “inexplicably gained 8% despite bearish inventory data and a lack of needle-moving news (war of the machines?),” they reported.

“Stepping back a bit, although the past 2 weeks have ended in negative territory, broader markets have still posted a gain of 5% in the third quarter,” said Raymond James analysts. “As investors come to grips with the fact that the quantitative easing bump has come and gone, they will now look for positive language from (US Reserve Bank Chairman Ben) Bernanke later today and possibly start looking forward to the upcoming earnings season.”

Meanwhile, the front-month Brent crude contract continues to trade around its 200-day moving average. “Brent fell all the way to $107/bbl last week but managed to claw its way back to current levels around $112.10/bbl,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group. “In contrast, the West Texas Intermediate front-month contract fell below its 200-day moving average (at $96.23/bbl) last week but failed to bounce back and is currently trading around $92.10/bbl.”

This, he said, is reflective of a Brent market that remains tighter than the WTI market. “This is also reflected in the forward curve for Brent, which remains in fairly steep backwardation as opposed to the WTI forward curve, which remains in contango out to June 2013. But the Brent crude price action is also a function of the crack spreads that remain at high levels incentivizing refineries to produce more products and demand more crude. While the US crack spreads have been elevated for some time now (except for a sharp drop in November last year), Asian crack spreads have now also edged higher since mid-June.”

Nevertheless, US inventory remains high, putting a drag on WTI prices. “After a summer of strong drawdowns of crude oil and product inventory on the back of the seasonal increase in US gasoline demand (driving season), crude oil inventories have once again started to climb overall,” De Wet reported.

In its latest inventory report for the week ended Sept. 21, the Energy Information Administration said commercial US crude stocks dropped 2.4 million bbl to 365.2 million bbl, yet remained above the 5-year average for the time of year. “In terms of days of supply, we have also seen a significant breach of the 5-year upper limit,” said De Wet. “We have never viewed this as a reason to get overtly bearish on oil. Instead, we have cautioned that we would not get too excited about the potential for US crude inventory draws to push WTI prices significantly higher.”

He noted the strongest liquidation “since early May” last week in net speculative length on WTI in the New York market “driven by decidedly bearish underlying moves.” De West said, “This decline coincided with the news that Saudi Arabia was consulting with refiners, having stepped up its supply of crude oil and would increase it further should demand conditions warrant it.” A similar move by Saudi Arabia in March provided the catalyst for a 3-month downward trend in crude oil prices,” he said.

Bakken oil

In other news, Raymond James analysts said, “The Bakken oil play has become the poster-child for US oil shale growth in recent years. In hand with this remarkable growth curve have come all the typical growing pains of being a land-locked crude—namely, having to succumb to pricing at a transportation differential to an already heavily discounted Cushing, Okla., based WTI price. Not surprisingly, with the storage glut still brimming at Cushing (and likely to be fully alleviated until the second half of 2013), Bakken producers have recently sought out higher-priced coastal markets (via rail) in order to bypass Cushing (and the cheaper WTI benchmark).”

They said many investors don't realize Bakken oil traded at a premium to WTI through most of September. That, they said, is “a clear indication that railroad takeaway capacity out of the Bakken play has reached an effective scale to clear out the Bakken regional oversupply, even during times of refinery turnarounds. Moreover, we would pose that Bakken prices have now actually disconnected from Cushing (and WTI prices) altogether and are now finding a price point that reflects the rail transportation cost all the way to the coastal markets (Light Louisiana Sweet or Brent). In our view, this supports a more sustainable Bakken-to-LLS/Brent differential of $12-20/bbl, a substantial improvement from the $40-plus/bbl differentials that Bakken barrels were receiving earlier this year.”

Energy prices

The November contract for benchmark US light, sweet crudes increased 34¢ to 92.19/bbl Sept. 28 on the New York Mercantile Exchange. The December contract advanced 35¢ to $92.56/bbl. On the US spot market, WTI at Cushing was up 34¢ to $92.19/bbl.

The November natural gas contract rose 2.3¢ to $3.32.MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 7.3¢ to $3.05/MMbtu.

In London, the November IPE contract for North Sea Brent increased 38¢ to $112.39/bbl. Gas oil for October dipped 25¢ to $980.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased $1.47 to $109.68/bbl. So far this year, OPEC’s basket price has averaged $110.18/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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