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The rising crude oil prices are now providing strong support for a rebound of RBOB gasoline cracks. Already RBOB has witnessed sharp recovery touching $7.27 last week. With WTI crude touching $82/bbl, RBOB gasoline have hit their second highest level of 207 cents/gallon.But is the bull run in RBOB gasoline destined to continue for some time? Is the prospects so promosing as we head for winter?
According to a Bank of America Merill Lynch (BofAML) report, the bull run in RBOB will not sustain and it strongly believes gasoline cracks will average $1.23/bbl in fourth quarter of 2009 and $5/bbl in first quarter of 2010.
The heating oil premium over RBOB this winter will widen Of course, the upside pressure on gasoline cracks spreads has almost eroded the traditional heating oil to RBOB gasoline premium this winter. At the moment, heating oil is trading at an average of $2.60/bbl above gasoline in the December 2009 to February 2010 contract window, compared to a realized average of $8.60/bbl over the past five years. With distillate demand set to strengthen further in line with economic activity and gasoline prices heading lower as refiners come back from maintenance, the heating oil premium over gasoline should widen overthe coming months, BofAML report added.
BofAML analysis stated that RBOB gasoline is now absorbing price shocks from pretty much every crude oil blend or petroleum fuel. On the assumption that WTI crude will surpass $100/bbl as we head into 2011, it is likely that RBOB gasoline will be impacted by that move. Therefore, the possibility of RBOB strengthening next spring or summer is highly probable, BofAML report added. RBOB will surpass heating oil prices by that time, the report predicts.
The $1.23/bbl view BofAML said that it has forecasted the average of $1.23/bbl on the back of low refinery utilisation rates and unexpected outages. The spike in gasoline prices this week is coming from two different sources. First, very low refinery margins have continued to drive down refinery runs in the United States, where refining capacity utilization has reached very low levels.
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In addition, a number of unexpected refinery outages this week, including Hovensa’s 500 thousand b/d St Croix refinery in the Caribbean and Valero’s 245 thousand b/d Texas City refinery, spooked the market and sent cracks shooting higher. But gasoline yields are benefiting from the extremely low production of middle distillates in the United States. In a long refiningsystem, BofAML report maintains that any counter-seasonal strength in RBOB gasoline cracks is unlikely to last.
The heating oil premium over gasoline has withered this winter with the former trading at $2.60/bbl above gasoline in the December 2009 to February 2010 contract compared to an average of $8.60/bbl over the past five years.The same window for next winter, in contrast, is showing an $8.70/bbl premium of gasoline over heat. In effect, this gap reflects the weight of an oversupplied middle distillate market this winter, coupled with the expectation of a much tighter distillate market in winter 2010/11.
In our view, the ensuing cyclical upswing will have a much more pronounced impact on distillate demand than the less cyclical gasoline sector, BofAML report added.
The middle distillate market is oversupplied at present as demnad in US remains in doldrum substantially below last year's levels. Higher economic activity is bound to rebalance supply and demand over the next few months, according to BofAML report.
While the distillate market is working through a tremendous surplus, it is also important to note that the gasoline market is not in a much better shape. Surely, gasoline demand in the United States is now above last year’s levels, but that is only a reflection of a low base resulting from the consumer recession of 2008 combined with the cash-for-clunkers program impacting car sales.Meanwhile, European gasoline demand is also very low and unlikely to get much better over the coming months as Europeans continue to shift towards diesel and more gasoline-efficient vehicles, BofAML report said.
