By Brian L. Milne, Energy Editor, Schneider Electric
After sliding to a 16-month low Oct. 24 at $2.5417 gallon, New York Mercantile Exchange November RBOB futures rallied 10cts through Monday (10/28), underpinned by technical support, news Libya oil production was sharply reduced and on market expectations the Federal Reserve would continue its bond buying program through the first quarter of 2014.
The seasonally weak gasoline market found support on the spot continuation chart in the mid $2.50s, the lows from 2012 plumbed in November and June, with additional support at the November 2011 lows in the mid $2.40s. These are key support points on the chart that would limit any downside move through the balance of the year.
Heading into the new week of trading with the NYMEX November RBOB futures contract set to expire Oct. 31, ushering in the December contract as nearest delivery for the Nov.1 session, the market was lent support from growing sentiment the Federal Reserve would maintain its stimulus efforts through early 2014 at a minimum.
The Fed, which has held overnight borrowing rates at near zero since the Great Recession, has also looked to stimulate economic activity through an $85 billion a month government bond buying program, with the goal of the asset purchases aimed at lowering the interest rate paid by the government for its debt. Lower interest rates, the thinking goes, would push investment from safe haven assets like Treasuries to riskier investments that would drive economic and employment growth.
The combination of low interest rates and active buying by the Fed, activity known as quantitative easing, has underpinned support for oil by weakening the US dollar. The greenback is the currency used in global crude trading therefore a weaker dollar has an inflationary effect on US oil and oil byproducts such as gasoline.
The Fed was widely expected to begin reducing its asset purchases in September. That didn’t happen, and the central bank is now not expected to taper its purchases before March 2014, with analysts highlighting mixed economic data, including a slowdown in US jobs growth, for the delay. On Oct. 25, the US dollar fell to a nearly 10-month low in index trading.
Overseas, reports indicate oil production from Libya, a member of the Organization of the Petroleum Exporting Countries, has tumbled to between 250,000 and 300,000 bpd after its 300,000 bpd Sharara field was shut-in. The field shut-in occurred after operations at the county’s western port of Zawai were suspended over the Oct. 26-27 weekend.
The Energy Information Administration (EIA) shows total oil production for Libya averaged 1.483 million bpd in 2012, up from 501,500 bpd in 2011 when the North African nation was embroiled in civil war. The current disruption in Libya’s oil production follows steep cuts in the third quarter also sparked by protests.
The Libyan output cut, and uncertainty on how long the reduction would last for spiked the December Brent crude contract on ICE Futures by more than $2.50 Oct. 28. Brent crude is used as a global price marker, including in guiding price setting by US gasoline suppliers. The RBOB contract gained nearly 4.5cts the same day.
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 email@example.com.