Brian L. Milne, Energy Editor, Schneider Electric
Seasonally, gasoline prices trend lower this time of year from higher summer values, albeit if the industry is not battling supply disruptions caused by a hurricane, with the peak storm season for the Atlantic Basin from late August through September. The hurricane count has been light this season which runs through Nov. 30, but considering monster storm Sandy hit the US coastline in late October, there remains risk.
Sept. 30 marks the end of the third quarter and the expiration of the October gasoline futures contract on the New York Mercantile Exchange, which is called Reformulated Blendstock for Oxygenate Blending referenced as RBOB. The forward curve is slightly backwardated through January 2014 delivery, meaning October is trading at a premium to November, setting up a downtick for when November rolls to nearest delivery.
The lower seasonal trend has been at work in September, pressuring RBOB futures to a $2.6065 gallon 9-1/2 month low on the spot continuation chart Sept. 24. The contract reversed off the low to trade back in the $2.70s range while ending Sept. 27 in the upper $2.60s. Support is found at the $2.5524 gallon November 2012 low.
Wholesale costs have been mixed across the country late September, while suppliers work to complete the transition to higher Reid vapor pressure gasoline at distribution terminals, which is less costly to manufacture than summer grade. The Energy Information Administration’s US gasoline average should continue lower in early October.
NYMEX crude futures have also declined, establishing a double bottom at $102.20 bbl Sept. 25-26 at a 2-1/2 month low on the spot continuation chart. Several factors converged to weigh on the crude contract, including increased production from Libya and Iraq. Meanwhile, seasonal maintenance at oil refineries that will cut back on crude demand has started, which also limits the volume of gasoline, diesel and other byproducts produced.
Another feature pressing crude costs lower is a possible thaw in the relationship between the United States and Iran, with the presidents of the two countries speaking by phone Sept. 27 which was the first time in 36 years top leaders from the two countries have spoken. The conversation offers the prospect of further meetings between the two countries that leads to some type of a solution to the West’s worry over nuclear advances by Iran that it views are enriching uranium to build a nuclear bomb. Iran insists its efforts are to produce electricity and for medical use.
Skepticism is high that a resolution would be found. Such a deal however would end sanctions against Iran that have reduced the Islamic nation’s oil exports considerably while crippling its economy. The end of sanctions would add more oil to the world market.
Front-and-center is domestic politics, with a logjam in budget talks set to shut much of the US government down Oct. 1. Standoffs between Republicans and Democrats, as well as with Republicans and other members of their party over spending and the Affordable Care Act dubbed Obamacare have so far prevented agreement on a budget. Meanwhile, the US government later in October is set to reach the limit of their allowed borrowing, creating another potential showdown in talks to lift the debt ceiling.
The lack of agreement and worry over the US government shutdown would pressure equity and commodity prices, including oil, due to lower economic growth. Should Washington find agreement, the market could jump amid a relief rally, although the lower seasonal trend would limit the uptick for gasoline prices.
About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.