In the history of CFTC data, hedge funds are currently holding a record net short (bearish) position on gasoline. Why? Well, rising inventory levels of gasoline nation-wide are surpassing demand. Peak driving season is coming to an end, and historically a decrease in gasoline demand is upon us. Just last week the EIA lowered the implied May 2016 gasoline demand by 213,000 bbls/day. According to Reuters, refiner PBF for example; who is feeling the effect of lower than expected gasoline demand and increased supply levels, has had to cut crude runs between 6 and 7% to remedy the increased supply levels. According to the DOT’s Federal Highway Administration, miles driven numbers are up, however more fuel efficient cars could be impacting gasoline demand. Summary: the market is very bearish on gasoline. Demand is lower than expected and inventory levels are rising exponentially.
Last week’s Baker Hughes data revealed the 5th consecutive week that the U.S. active drilling rig count has increased. Last week’s addition of three rigs brought July’s total to 44. This monthly addition marks the biggest monthly increase in rigs in the last 2 years. During the first two quarters we witnessed a price rebound on crude from $26 to just over $51 in early June. This rally in crude oil prompted numerous oil producing companies to turn rigs back online. However, as we all know, an increase in production means an increase in the supply of crude. (See Bloomerg.com’s chart below detailing the relationship between U.S. crude production and crude prices.) During a time of a much needed re-balance in the overall crude market, an over-hanging supply glut, that could potentially get much bigger, coupled with refineries cutting their crude runs, is not what the doctor ordered.
Finally, crude oil continues to flood the globe, and it may get worse. Supply from OPEC rose from 33.31 to 33.41 million barrels per day in July, and OECD inventories are well over “prime” levels. . In the past few months both Iraq and Iran have significantly increased their crude output, and no slow-down is in sight. Iran, whose post-sanction re-build is in full throttle, is on the verge of their new Iran Petroleum Contract (IPC), which incentivizes foreign investors to oil development in Iran. If “Supply-Glut” where a song title, it would be #1 on Billboard.
Crude prices are feeling the pressure. Crude is currently down $1.35 to $40.25, and refined products, RBOB and ULSD are down $0.0222 and $0.0485 respectively.