As refiners started running, crude oil came back on an inventory miss and a surging stock market, RBOB got whacked. Forget the calendar, RBOB and ultra-low sulfur diesel are going in opposite directions as the Energy Information Administration report is helping to confirm the call that I made in February that the top for gasoline is more than likely in for the year. As I wrote Feb. 15 in an article I titled, “Top of the Tank,” “RBOB gasoline futures exploded but it is possible that we could be seeing a blow-off top. A silly surge on talk of refining issues and talk of tight gasoline blending components sent prices flying. Yet the lack of follow through with the crude oil and heating oil may mean that this historic run on gas on the upside may soon be coming to an end.”
RBOB has not looked back since. Yesterday the Energy Information Administration reported refineries operated at 86.8% of their operable capacity last week. Gasoline production decreased last week, averaging about 8.8 million barrels per day. Yet while gasoline production fell back a bit from its seasonally high rate, imports to the East and West Coast helped create a big surge in gasoline supply. The Energy Information Administration reported that total motor gasoline inventories increased by 1.7 million barrels last week and are at the upper limit of the average range. Finished gasoline inventories decreased while blending components inventories increased last week.
Yet oil failed to match up with building expectations and fell far short of the weekly net change number that the American Petroleum Institute report gave us. It took a surging stock market for oil to come back and shake off the wildly bearish gasoline build.
Distillate fuel inventories, on the other hand, decreased by 0.2 million barrels last week and are in the lower half of the average range for this time of year. Which means that in a weird way this report sent the same message as the report we had last week, especially for the old widow maker spread otherwise known as the RBOB/heating oil spread. Last week traders were warned when I wrote April 3, "….Strong refining runs and an abundance of crude is making gasoline the weakest of the petroleum sector. The pain that we experienced during the historic run up in February probably is the reason that gas is falling today. Early forced maintenance and weak demand and an abundance of crude should mean that we will be in much better shape as we head into this summer driving season.” I guess you could say that again. And I did!
The other thing that I can say again is that the natural gas market continues to suggest a long term bottom. Today that strength may be coming from what should be another draw on supply and the fact that winter in some parts of the country refuses to go away quietly.
Yet longer term I continue to talk about the surge in the demand curve that is now exceeding production increases. One example comes from “Sir Duke” or Duke Energy that said yesterday, “Celebrated the opening of the Dan River Natural Gas Combined Cycle Station in Eden, N.C. Located in Rockingham County, the state-of-the-art plant has an electric capacity of 620 megawatts (MW). The new station is part of the company's modernization effort to retire older, less-efficient coal plants and replace them with cleaner-burning natural gas-fueled units – resulting in decreased emissions and higher efficiency. Capable of powering approximately a half-million homes, the natural gas combined-cycle plant has nearly doubled the capacity of the older coal units that were retired on the site in 2012.”
As I wrote Jan. 16, “While natural gas seems to have broken up into its December trading range from its lower first half of January trading range, the longer term strips seems to suggest that it might be time to be thinking about a long term bottom. That is not to say that in the short term, in the next year so, that natural gas might not slip below $3.00 or even $2 for a short term, if you are looking 2 to 20 years out it might be time to start locking in prices. Bids across the time scale seems like players would be thrilled to lock in anything below $4. Maybe it's time to start looking at far out bullish natural gas strategies.”
The New York Times reports today the, "Energy Department is preparing to test a new way for solar power to make electricity: Using the sun’s heat to increase the energy content of natural gas. Researchers at the Pacific Northwest National Laboratory in Richland, Wash., hope by this summer to carry out the test, which entails a process that could cut the amount of natural gas used — and the greenhouse gasses emitted — by 20%. “We can reduce carbon dioxide emissions, and the consumer doesn’t get hit,” said Robert Wegeng, the researcher in charge of the project."
The system is a marriage of chemical engineering and mechanical engineering. The process will work anywhere it is sunny, according to researchers, although it might be more valuable in places where natural gas is relatively expensive, or where a company making electricity would be paid for generating less carbon dioxide. The project, financed with $4.5 million in federal stimulus money, is still in development, and experts say the technology’s costs have yet to be established. The process also is several major steps away from commercial viability. A must read!