Enthusiasm around RBOB is at rock bottom levels, but some improvement in retail spot prices looks likely through July.

Summary:

• Speculative positioning in the US RBOB contract continues to hold at a 52-week low, a sizeable reversal after the net long position managed a 52-week high just two months ago. Simply put, speculator enthusiasm around RBOB price appreciation is at rock bottom levels.
• Much of the bearishness currently at play is due to a combination of ample supply availability and weak demand. PADD 1 imports, a good proxy for US gasoline consumption, are broadly lagging year earlier levels and US refinery runs hit a post-Covid high of 16.7 Mbd in May. The imminent full start of the Dangote reformer adds yet additional supply to the Atlantic market. It looks highly unlikely that we will get another spike in RBOB cracks similar to what took place beginning around this time last year.
• In mid-May, we argued for the possibility that US gasoline prices average in a range between $3.70 - $3.80/gal through much of the summer. By the end of May, we steadily drew closer to this range with prices averaging $3.52/gal. Nonetheless, prices eased considerably into June ($3.33/gal) in response to broadly lower oil prices through May ($78.58/bbl) relative to April ($84.39/bbl). However, retail unleaded prices are likely to trend back towards $3.50/gal in July if WTI prices can maintain near $80/bbl for the duration of the summer, an outcome we see as likely through July before oil begins to trend lower again starting in August.

Over the past several months, we have kept a close eye on the state of the US gasoline market heading into the summer driving season. Now that July is quickly approaching, peak demand is rapidly underway. However, the market could hardly be described as bullish. Commitment of Traders data on the RBOB contract reveals that speculator positioning has pushed net longs to a fresh 52-week low, a sizeable reversal after the net long position was sitting at a 52-week high just two months ago (early-April). The RBOB crack spread has also eased, currently averaging just under $24/bbl through the month of June, down from $31/bbl in April.

Weekly RBOB Speculative Net Long Contract Position

Source: CFTC

Much of the bearishness currently at play is due to the combination of ample supply availability and weak demand, particularly in PADD 1. US refinery runs look extremely healthy. While throughput has eased a bit in June (16.5 Mbd, +60 kbd y/y), this follows a post-Covid peak of 16.7 Mbd seen in May, marking a gain of more than 500 kbd y/y. Further afield, supply also looks elevated. The Dangote refinery reformer unit is slated to go into full operation next month and some incremental gains have also taken place across the Middle East, as refinery infrastructure increases across that part of the world. It looks highly unlikely that we will get another spike in RBOB cracks similar to what took place around this time last year, especially amid weak VGO prices, which tend to incentivize runs, even with weaker cracks.

There is also the issue of US demand. PADD 1 gasoline imports are often a great proxy for US demand, especially in the post-Covid period, which has seen refinery capacity tighten significantly within the region. So far this year, PADD 1 gasoline imports, which tend to rise beginning in April before peaking in the summer, have averaged roughly 500 kbd between April and June, below levels seen in 2022 (535 kbd), and 2023 (595 kbd). A lack of supply availability is certainly not a problem. Europe currently enjoys a gasoline surplus of more than 1 Mbd. Despite relatively weak import levels, PADD 1 inventories have managed to build, adding roughly 4.2 Mb between mid-April and mid-June. In the five-year period before Covid, this April – June stretch of time typically saw inventories hold flat across the region.

Monthly PADD 1 Gasoline Imports (kbd, top) and Y/Y Delta (kbd, bottom)

Source: Kpler

This brings us to a discussion around the implications for gasoline spot prices, which are relevant when assessing the forward impacts on US inflation, and Fed policy. In mid-May, we argued that there was a possibility US retail unleaded would average in a range between $3.70 - $3.80/gal through much of the summer, largely driven by a recovery in oil prices relative to year earlier levels. In May, we steadily drew closer to this range with prices averaging $3.52/gal, albeit prices eased considerably into June ($3.33/gal) in response to broadly lower oil prices through May ($78.58/bbl) relative to April ($84.39/bbl). However, retail unleaded prices are likely to trend back towards $3.50/gal in July if WTI prices can maintain near $80/bbl for the duration of the summer, an outcome we see as likely through July before oil begins to trend lower again starting in August.

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