There's a reason this week's EIA survey showing gasoline and oil supplies declining has failed to stop RBOB prices from collapsing to 7-month lows: The start of the summer has done nothing to revive sluggish demand. That's because despite what the EIA survey said, little has been done to reduce record fuel inventories.
The squeeze has gotten so bad, Northeast Colonial Pipeline Co., the operator of the biggest US fuel pipeline system, said that demand to transport gasoline to the country's populous northeast is the weakest in six years, the latest symptom of a global oil market grappling with oversupply. It’s notable that this peak has arrived despite the advent of the summer driving season, which has seen gasoline demand pull back from last year's record highs, according to Reuters.
Because of the oversupply in the northeast, “line space”… the cost of renting “space” on the pipeline to assure one’s ability to get supplies of gasoline when necessary… has gone negative, according to Reuters. What can be more exemplary of excess inventories and of reduced demand for gasoline than this?
Refiners are in part to blame for the problem - they have continued to pump motor fuel at record levels for the second year in a row, worsening the oversupply problem, for fear of losing access to pipeline capacity.
More broadly, attempts by large producers to reduce global supplies have failed to meaningfully raise the price of oil. And with good reason: Traders have been skeptical of an agreement between OPEC and non-OPEC producers, including Russia, to extend last year's supply cut, and already they're concerns are being validated: Iraq has said it plans to increase production later this year despite the agreement.
The existence of negative capacity is a reversal of the typical dynamic, where refiners are forced to supplement their deliveries with tanker shipments or imports.
"The only reason [the pipelines] wouldn't be full is clearly that inventory levels are high enough that there is no incentive to move product to New York," said Sandy Fielder, director of oil and products research, Morningstar in Austin, Texas.
"The situation is quite unusual," he said.
Even when high inventories make it unprofitable to do so, refiners typically keep pumping full volumes just to ensure they keep their rights to the line space, said Fielden.
But it appears as if refiners have finally reached the point where the financial pain outweighs the necessity of keepig their lease on some pipeline space - after all, Colonial has capacity to spare right now.
"It's purely economic - why ship into a negative arb(itrage) for that long," one trader said.
Colonial connects Gulf Coast refineries with markets across the southern and eastern United States through more than 5,500 miles (8,850 km) of pipelines, delivering gasoline, diesel, jet fuel and other refined products. Colonial indicated it did not expect demand to exceed capacity for the next five-day cycle through the line, and informed shippers it would therefore not follow the typical process for rationing space.
Oil traders who insist on staying long can hold out hope that production shutdowns related to Tropical Storm Cindy could lift the price of oil for a short period. It's also worth noting that Dennis Gartman, who recently said oil wouldn't rise above $44 a barrel again in his lifetime, just turned bullish folllowing a wave of downgrades from energy analyst. That could be good news...or maybe not.
While the cause of the supply is obvious, whatever has caused demand to fall off is less clear. Barclays has suggested that President Donald Trump's immigrant crackdown has made millions of illegal immigrants living in the US afraid to get behind the wheel for fear of being detained and deported. If this is true, that means Trump is to thank for gasoline prices falling to their lowest levels since February, despite the start of the summer driving season?