One month ago, before the commodity trading world's attention turned to the unprecedented glut in gasoline stocks, we wrote "PADD 1 Is A Holy Mess" - Is This What Finally Drags Crude Oil Lower, in which we showed the historic excess of gasoline stocks on the US East Coast, known as the PADD 1 region. A week later, in a follow up article we explained that as a deluge of Chinese gasoline exports had flooded the world, the PADD1 glut was only getting worse, leading to a pile up of tankers in New York harbor. It got so bad, that gasoline stockpiles in PADD 1 rose to a record 72.5 million barrels in the week ended July 22.
Meanwhile, as crack spreads collapsed, concerns about both gasoline and oil demand emerged, leading to a sharp selloff in oil, and the recent bear market in WTI. After all, the key bullish narrative for the oil long case was that with a strong summer driving season, gasoline was not going to be a production bottleneck, and yet this is precisely what happened.
However, over the past week, gasoline inventories finally drew down, and as we reported yesterday, commercial gasoline stocks decline by 3.3 million barrels according to the DOE (if a far smaller 450K according to API).
The hope that gasoline demand was finally picking up (and/or supplies were declining) is what prompted the substantial short covering rally in crude over the past 2 days, from a low of just over $39 hit on Monday. But it the much needed decline in stocks really an indication of rebalancing?
To be sure, on one hand, some refiners have indeed curbed or even shut down production. As Bloomberg reports, "facing the region’s worst-ever glut of gasoline, suppliers are beginning to turn off the taps in response to low margins. Profits are gradually starting to rebound, though they remain at a five-year seasonal low."
In the biggest reduction to date, Delta Air Lines Inc.’s Trainer, Pennsylvania, refinery was said Tuesday to cut total production by about 23 percent, or 43,000 barrels a day. Trainer plans to focus on making jet fuel rather than gasoline while margins of the motor fuel are weak, according to a person familiar with the refinery’s operations who couldn’t be named since the matter is private.
PBF Energy, which has more than 340,000 barrels a day of refining capacity on the East Coast, is also “taking steps” to reduce production into the third quarter, Chief Executive Officer Tom Nimbley said Friday on the company’s second-quarter earnings call. “The bottom line is we know we’ve got too much product, and that’s having pressure points on the margins.”
Philadelphia Energy Solutions Inc. also reduced output by 10 percent in early July at its two-refinery Philadelphia complex which supplies the New York Harbor market, according to a person familiar with operations who declined to be named.
The market's reaction has been prompt, and the WTI crack spread quickly rebounded from what was a near record low for this time of the year.
Then there is the "other" issue we discussed a few weeks ago, namely the early shift from summer to winter blend, as refiners give up on the summer 2016 driving season in hopes next year's will be stronger. Here is Bloomberg catching up on this:
A complicating factor in reducing supplies is that refiners make different grades of gasoline for use in the summer and winter because of environmental regulations. Summer-grade fuel typically must be used up before the market begins transitioning to winter-grade gasoline in mid-September. But it may now be possible to profit from buying summer-grade gasoline and storing it until April because prices are so depressed by the record-high stockpiles along the East Coast, Philip Verleger, president of the economic-consulting company PKVerleger LLC, said in a note Monday.
But as it turns out, the biggest reason why there was a very "bullish" - for oil - gasoline draw is also the simplest: the excess gasoline was simply moved from one, massively overstocked place, to another.
Remember that pile up of tankers in NY harbor we wrote about a month ago? Well, they're gone. But not because there is demand for their product - they simply found a different place where to store their excess inventory. From Bloomberg:
Gasoline has also shifted south amid cargo diversions and deviations. A 330,000-barrel tanker usually on the Houston-to-Jacksonville, Florida, run last month moved two products cargoes to Florida from New York Harbor, according to vessel tracking data compiled by Bloomberg. Since June, at least eight foreign import cargoes originally booked to supply New York were sent instead to the U.S. Gulf Coast and Mexican West Coast.
And just like that, the DOE gets to report a gasoline draw, even though neither supply, nor demand has changed, but was merely a cargo that disappeared from the books as it moved from point A to point B.
Sadly, the problem remains as there is no excess demand for gasoline at either Point A or Point B. Which means that the bullish catalyst that sent oil surging this week on a modest decline in gasoline, will promptly reverse itself as the tanker glut returns, at either of America's numerous ports.
As PKVerleger summarized, “The situation is extraordinary,” and indeed it is, as industry players resort to every last trick in the book to feign incremental demand for either gasoline or oil, when none exists.