More Oil, Less Gasoline

By Brad Zigler

Crude oil closed lower on Tuesday, ahead of the U.S. Energy Department's weekly inventory report, widening crack spreads to levels not seen since January. Overnight, crude prices recovered slightly on short covering as traders seemed to heed analysts' forecast for a 2.8-million-barrel decline in domestic crude oil stocks. They needn't have bothered, though. The Energy Department, it turns out, reported oil stocks growing by 4.7 million barrels last week.

Oil Patch insiders were also off base in their calls for a 1.7-million-barrel drawdown in distillate fuels inventories. Supplies of these fuels, including diesel and heating oil, fell by only 1 million barrels. Gasoline inventories fell by 2.6 million barrels instead of growing by the half-million barrels anticipated by analysts.

Tuesday's traders, focused on seasonality, took gasoline higher in the NYMEX floor session. In fact, the day ended with gasoline at a premium to heating oil, a pricing phenomenon not seen since last February.

The move boosted margins both for futures and ETF spreaders. The 2-1-1 futures crack (two barrels of crude cracked into one barrel, each, of gasoline and heating oil) gained 65 cents per barrel on Tuesday while the analogous ETF combination - long positions in the ProShares UltraShort DJ-AIG Crude Oil ETF (NYSE Arca: SCO), the United States Gasoline Fund (NYSE Arca: UGA) and the United States Heating Oil Fund (NYSE Arca: UHN) - picked up $2.65.

This year, the futures spread has improved 88%, while the ETF combo's gained 19%.

Crack Spreads: Futures Vs. ETFs

The gasoline/heating oil spread (described in "Energy Spreads Offer Leveraged Profits, Reduced Risk"), reflecting seasonal tightening in gasoline supplies, has widened more than 33 cents this year.

Technically, crude oil remains weak, needing a close over $41.95 in the nearby contract to signal the setting of a near-term low. Support for the contract is at $36.51.

Comments

[cyberclark:]

The article implies gasoline is the principal product running opposite oil. No refinery is in the business of making gasoline! The refineries are built to produce various diesel fuels. This is done by taking off the HVB (high vapour base).

The HVB is what the gasoline is made up of. If there is no diesel demand there is no HVB to make gasoline with. Conversely if the gasoline is not sold the storage fills up. With no place to put the HVB production dwindles.

Feb 12 11:26 AM

[ROLEX18:]

ETF's are ment to milk investors who don't understand how or from where their price is derived, when you buy/sell something you must first know if it's a fair market price, excluding USO and UNG for NatGas most other ETF and ETN are trading books, but not the asset you think you trade, it is very complex but understanding crack spreads looks like an easier option to uneducated.

Feb 12 11:41 AM

[Brad Zigler:]

Where did you see the implication that gasoline manufacturing was the principal objective of refining?

A refinery's production mix is seasonal. Sometimes gasoline production is favored, sometimes not. That's reflected in the product cracks.

As diesel futures are moribund, retail investors have no real-time diesel pricing guidelines. Heating oil futures are active and reflect diesel pricing, so a 3-2-1 or 2-1-1 crack fairly well approximates refining yleds.

On Feb 12 11:26 AM cyberclark wrote:

> The article implies gasoline is the principal product running opposite
> oil. No refinery is in the business of making gasoline! The refineries
> are built to produce various diesel fuels. This is done by taking
> off the HVB (high vapour base).
>
> The HVB is what the gasoline is made up of. If there is no diesel
> demand there is no HVB to make gasoline with. Conversely if the gasoline
> is not sold the storage fills up. With no place to put the HVB production
> dwindles.

Feb 12 01:38 PM

[Brad Zigler:]

Just how, in your estimation, do ETFs or ETNs "milk" investors?

Why would you except USO and UNG from your condemnation?

Why would a crack spread be a trade for the "uneducated"?


On Feb 12 11:41 AM ROLEX18 wrote:

> ETF's are ment to milk investors who don't understand how or from
> where their price is derived, when you buy/sell something you must
> first know if it's a fair market price, excluding USO and UNG for
> NatGas most other ETF and ETN are trading books, but not the asset
> you think you trade, it is very complex but understanding crack spreads
> looks like an easier option to uneducated.

Feb 12 01:43 PM

[scfranklin94:]

Gasoline has a shelf life, unlike crude oil; the gasoline inventories are high, so it makes sense for the refineries to back off production and let the unleaded gasoline inventories decrease.

Feb 13 09:32 AM

[Brad Zigler:]

Well, actually crude oil DOES have a shelf, er, tank, life.

That crude CAN be stored, in-ground and in tanks, allows the current cash-and-carry trade to flourish.

A swollen crude inventory is contributing to the deep contango in the WTI market.


See "It's the Oil Carry, Not the Contango" at www.hardassetsinvestor....

On Feb 13 09:32 AM scfranklin94 wrote:

> Gasoline has a shelf life, unlike crude oil; the gasoline inventories
> are high, so it makes sense for the refineries to back off production
> and let the unleaded gasoline inventories decrease.

Feb 13 10:40 AM

[BxCapricorn:]

So, what all of this means is that the EIA cannot perform simple forecasts and estimates, Matt Simmons (and his book) was a shill for the oil traders, CNBC aided and abetted the crime by showing "The Oil Crisis" super-imposed on their broadcast screen for months, and that various dooms-day scenarios (i.e. world hunger/fertilizer production drops) are just red herrings aimed at fleecing investors. The SEC recently investigated charges of commodity traders, brokerages, etc. manipulating the cost of oil, and surprisingly found nothing.

Did anyone apologize to the Saudis, after we spent months blaming them for the ramped cost of oil? They were as much a victim as everyone in the World whose culture is based on access to cheap energy. Now that the world has adjusted and usage has dropped, the oil exporting countries can't give their product away, and they need to, just to pay for the over-leveraged infrastructure and social projects they started during oil's climb. It will be interesting to read about Texas, Alaska, etc. who mocked the rest of the country's housing related woes during oil's peak, only to now find themselves staring at their own abyss.

Feb 14 03:07 PM

[Brad Zigler:]

To be fair, the weekly inventory estimates referenced above aren't EIA's, but those of (mostly) sellside analysts.

A lot of misplaced opprobrium was heaped upon oil index investors for supposedly running up oil prices. The argument, however, is refuted by hard facts (see: "Congress Blames Index Speculators" at www.hardassetsinvestor...).




On Feb 14 03:07 PM BxCapricorn wrote:

> So, what all of this means is that the EIA cannot perform simple
> forecasts and estimates, Matt Simmons (and his book) was a shill
> for the oil traders, CNBC aided and abetted the crime by showing
> "The Oil Crisis" super-imposed on their broadcast screen for months,
> and that various dooms-day scenarios (i.e. world hunger/fertilizer
> production drops) are just red herrings aimed at fleecing investors.
> The SEC recently investigated charges of commodity traders, brokerages,
> etc. manipulating the cost of oil, and surprisingly found nothing.
>
>
> Did anyone apologize to the Saudis, after we spent months blaming
> them for the ramped cost of oil? They were as much a victim as everyone
> in the World whose culture is based on access to cheap energy. Now
> that the world has adjusted and usage has dropped, the oil exporting
> countries can't give their product away, and they need to, just to
> pay for the over-leveraged infrastructure and social projects they
> started during oil's climb. It will be interesting to read about
> Texas, Alaska, etc. who mocked the rest of the country's housing
> related woes during oil's peak, only to now find themselves staring
> at their own abyss.

Feb 14 06:47 PM