Hedging Against Falling Gasoline Prices using Gasoline Futures

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Democrats and Republicans at impasse over boosting small-business aid

Saudis, Russians reportedly reach agreement in principle to cut oil production

Futures Movers

Crude supply drop buoys oil; gasoline futures fall

Myra P. Saefong and

Michael Kitchen

U.S. crude supply down 6.9 mln barrels; gasoline stockpiles rise

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SAN FRANCISCO (MarketWatch) — Oil futures closed higher Wednesday, buoyed by a drop in U.S. supplies that was nearly three times more than expected, but gasoline futures fell on the back of a surprise rise in the fuel’s stockpiles.

Comments from Federal Reserve Chairman Ben Bernanke during his first day of Congressional testimony contributed to oil’s up and down price movements, but analysts said the Fed chief said nothing new.

Crude oil for August delivery CLQ23, -56.76% added 48 cents, or 0.5%, to settle at $106.48 a barrel on the New York Mercantile Exchange. The contract fell 32 cents on Tuesday.

Gasoline futures fall after unexpected rise in the fuel’s U.S. inventories.

From here, oil may see further gains, “but we feel with the recent strength we have seen, another catalyst would have to develop,” such as one that’s geopolitical or a supply disruption, said Tariq Zahir, a managing member at Tyche Capital Advisors.

On Wednesday, the crude-supply drop was a key reason for oil’s rise. The Energy Information Administration reported a 6.9 million-barrel fall in crude stockpiles for the week ended July 12. Analysts polled by Platts were looking for a 2.5 million-barrel decline.

The American Petroleum Institute late Tuesday had reported a decline of 2.6 million barrels.

The EIA draw “wasn’t as large as the last 2 weeks,” said Zahir. “Couple that along with rather large builds in gasoline and distillates, that more or less offset the draw in crude.”

The EIA reports in the previous two weeks had shown a total decline of roughly 20 million barrels in crude inventories.

The oil trading market is “probably looking at other themes right now, and some of the low inventory theme has already been priced into WTI oil at this time,” said Richard Hastings, a macro strategist at Global Hunter Securities.

On ICE Futures in London, prices for the September Brent crude contract UK:LCOU3 added 47 cents, or 0.4%, to $108.61 a barrel. The August contract expired on Tuesday.

Gasoline prices fall

Gasoline prices, meanwhile, fell, marking only their second session decline in seven.

The EIA reported that gasoline supplies rose by 3.1 million barrels, while distillate stockpiles, which include heating oil, gained 3.9 million barrels. Gasoline stockpiles were expected to be unchanged for the week, while forecasts called for an increase of 1.8 million barrels for distillates.

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August gasoline US:RBQ3 edged down by more than 2 cents, or 0.8%, to close at $3.11 a gallon, while August heating oil US:HOQ3 closed up over 2 cents, or 0.8%, at $3.07 gallon on Nymex.

The market saw a hefty gain in unleaded-gasoline supplies along with weaker demand for gasoline and “we do expect demand to be weak as prices are starting to rise for the public at the pump,” said Zahir.

As for Bernanke, Zahir said there wasn’t anything surprising in the Fed chief’s first day of testimony to Congress.

In prepared remarks to a congressional committee Wednesday, Bernanke said the Fed’s proposed timetable for tapering its $85 billion-a-month bond-buying program is not set in stone. Read the live blog of Bernanke’s testimony and see the video.

Ahead of the close of Nymex oil trading Wednesday, crude prices briefly pulled back. The Fed said its so-called Beige Book assessment showed that the U.S. economy is continuing to grow at a “modest to moderate” pace.

Elsewhere in the energy complex Wednesday, natural gas for August US:NGQ13 delivery settled down nearly 5 cents, or 1.3%, at $3.63 per million British thermal units.

The EIA will provide an update on weekly natural-gas supplies on Thursday. Analysts polled by Platts are looking for a climb of between 66 billion cubic feet and 70 billion cubic feet.

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How do you build a successful strategy to hedge fuel prices with options on gasoline futures?

Pricelock provides a web-based tool to help businesses do exactly this (lock in a price on a number of gallons.)

There’s some helpful info on the site that talks about some of the strategic elements to keep in mind:

The important thing to think about is correlation between what index you use to hedge and your local gasoline prices. For example, prices in California tend to vary a lot from prices in Kansas – so an index thats appropriate for one location might not be at another.

Oil Prices Rebound On Falling Gasoline Futures

One hundred and thirty-one years after the birth of the mighty Jelly Roll Morton, the crude complex has got the blues once more. Prices moved lower initially but spiked on Russian rhetoric in the late morning, while gasoline futures fell as the Colonial pipeline panic eases, and as the ebb and flow of OPEC expectations wane once more – after wax-on action yesterday. Hark, here are six things to consider in crude oil and natural gas markets today:

1) The current situation in the U.S. gasoline market caused by the Colonial pipeline spill has been described by our fearless leader (Abudi Zein) as ‘pushing down on a balloon’: as one side is pressured lower, the other side swells up. This is exactly what is underway regarding regional gasoline supply and inventory.

East Coast gasoline stocks are being drawn down strongly amid a starvation of supply, while at the other end of the pipe, inventories on the Gulf Coast are swelling, as gasoline is stranded.

Gasoline imports into the East Coast last week were helped by a rebound in flows from both Northwest and Southern Europe, but a lack of cargoes from Canada mean there will be no blowout in terms of total imports from tomorrow’s weekly EIA inventory report.

As for the flip-side, Gulf Coast gasoline exports have been averaging around 700,000 barrels per day in the past few months, as exhibited by our ClipperData (hark, right). Nearly forty percent of these exports head to Mexico, while Latin America as a whole takes the overwhelming majority – with Venezuela, Colombia, Panama and Brazil the leading recipients.

2) If Abudi Zein is the Oracle of Oil (he is), then Eric Rosenfeldt (@energyrosen) is the Guru of Gasoline. Via the Wall Street Journal today, he expects fuel-supply problems in the Southeast to last for five or six weeks. Even once the Colonial pipeline is repaired ‘you have to replenish everything at the retail level and everything at the wholesale level, and that’s a significant amount of barrels.’

3) The latest JODI data show Saudi crude exports for July were at 7.5 million bpd. Our ClipperData show crude loadings have held at this level for August, and are currently at the same pace thus far in September.

We discussed recently how the start up of a new gas development, Wasit, in Saudi Arabia has boosted domestic natural gas production and crimped the need for the direct burn of crude by

100,000 bpd this year (hark, it is usually at

900,000 bpd at the peak of summer, summer, summertime). The latest JODI data show direct burn is down 151,000 bpd for this July compared to year-ago levels:

(Click to enlarge)

4) After starting the injection season at a whopping surplus to last year of over 1 trillion cubic feet (or 69 percent), this year’s natural gas build has been at about half the pace of that seen in recent years (see below).

This has not only been due to a lack of urgency, but also due to falling production, as well as a record power burn this summer – as cheap, cleaner-burning natural gas has continued to displace coal-fired generation.

Given this backdrop of rebalancing, prices have accordingly responded. Prices have clambered into three dollardom today. for the first time in 16 months.

(Click to enlarge)

5) The chart below shows the price per day to lease a floating rig, which cost about $500 million to purchase outright. The lease price has dropped by 60 percent in the last two years, as demand has vanished amid the lower oil price environment.

Transocean has a number of these rigs sat 12 miles offshore Trinidad and Tobago. They are cold-stacked, which means the engines have been switched off, as opposed to warm-stacking, where the motors are kept running despite them not being in use. The cost savings betwixt the two is significant: $15,000 a day, compared to $40,000.

Cold-stacking these floating rigs has helped Transocean make a surprise profit in Q2, but what is more telling is the fact they have cold-stacked them in the first place. It indicates an expectation that demand won’t be returning any time soon.

(Click to enlarge)

6) Finally, here is a link to an interview I did with Brown Brothers Harriman, with insights into the global oil market based on our data.

Oil’s plunging—why hasn’t gasoline fallen faster?

Economists call it the “rockets and feathers” phenomenon. Rockets zoom higher, but feathers float lower.

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There’s pretty wide agreement that gasoline prices seem to rise quickly when oil spikes, but they don’t fall so quickly when crude crashes. There’s little consensus about why.

The latest data point comes with the recent plunge in global crude oil prices; West Texas Intermediate has fallen from a summer peak of about $102 to just above $66 on Thursday. That’s a 35.3 percent drop.

During the same period, the average price of a gallon of gasoline has fallen from $3.77 to $2.86—or just 24 percent.

That lag in the price drop at the pump has a fairly simple explanation: The gasoline you buy today was made with crude oil bought when prices were higher. So it takes a while for the price savings to move through the supply chain.

What’s not so obvious is why prices seem to move faster to the upside when the price of crude oil rises. In technical terms, this is known as the “asymmetric, nonlinear pass-through of crude oil prices.”

Drivers call it “gasoline refiners and dealers getting greedy.”

Economists have studied the crude-gasoline price connection for decades. While they can’t agree on the causes, many studies seem to confirm that the asymmetry is real.

In 2020, a Federal Trade Commission study found that on average, retail pump prices rise more than four times as fast as they fall. The effect was more pronounced with branded gasoline than unbranded gas. And the “rockets and feathers” phenomenon was worse in Midwest cities than elsewhere in the U.S.

Researchers have sought to explain what’s going on—with mixed success. One reason the two prices don’t move in lockstep is that different market forces apply to crude and gasoline. Here’s a sampling of the answers researchers have come up with:

Competition: When gasoline prices are falling, some gas stations hold onto higher prices simply because they can. In locations where there are fewer stations competing for your business, there’s less pressure to cut prices, so they hold off as long as possible. That’s harder to do when prices are rising, cutting into already razor-thin profit margins. (Gasoline retailers typically make only a few pennies a gallon on gas, booking the bulk of their profits from the snacks and soda sold inside.)

Clueless consumers: Clemson University economist Matthew Lewis theorizes that prices seem to fall more slowly, in part, because drivers remember the last price they paid when they filled up. In spite of those 6-inch-high numerals on top of the pump, they may be slow to realize prices are falling prices until they go to refuel.

Location: Though price changes are usually tracked using national averages, the price you pay varies widely from one pump to the next. Taxes, transportation costs, local supplies, changes in commuting patterns can all act independently on gas prices, which can amplify the impact of crude price runups and crashes.

That’s why “it may not be surprising that we found more asymmetry at the local level than at the national level,” according to economists at the St. Louis Federal Reserve.

The weather: Price changes also vary widely with the season. In much of the country, refiners have to produce different blends for summer and winter months. Summer fuel is more expensive. “During the winter, the rate at which gas prices are pulled down by oil prices appeared to be higher than it was during the summer,” according to St Louis Fed researchers.

Taxes: When you top off your tank, you’re paying for more than just the cost of the gasoline. In states where taxes are high, that can be a big part of filling up. When gas prices rise, you pay extra for the gas, When they fall, you still pay the full tax, which are levied per gallon rather than per dollar. So taxes skew the ratio between the price of gasoline and crude oil, researchers at the Cleveland Federal Reserve have noted.

Global demand: Until relatively recently, gasoline refined in the U.S. was sold only in the U.S. Though still a small share of production, the volume of U.S. exports is rising as U.S. demand has shrunk. That’s helped cushion the downward price pressure from falling crude prices.

(CORRECTION: This story has been updated to correct the percentage drop in gasoline prices.)

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