SPGSHUP: More Bad Than Good News Ahead Of Gasoline Markets

ETFS



Investment thesis

Since our last release on the S&P GSCI Unleaded Gasoline Index Excess Return (SPGSHUP), our view has not emerged, as the Index appreciated slightly, up 2.69% to $967.05 per barrel.

In spite of that, we maintain our bearish recommendation and believe that this technical pullback will not last, given that the U.S. storage picture continues to evolve in a slight surplus, net speculative positioning indicates a stretching of short positioning and demand for the motorist blend is still too weak to cope with supply.

U.S. gasoline reserves weaken, but price seasonality and storage shortage are bearish for the SPGSHUP Index

During the week ending October 4, gasoline reserves in the U.S. withdrew for the second straight week, down 0.53% (w/w) to 228.8m barrels, the EIA shows. With that drop, the seasonality of gasoline storage reduces slightly its 5-year surplus to 2.3% or 5,044.8k barrels, while deepening its yearly deficit to 3.1% or 7,409k barrels.

That being said, the gasoline storage picture remains slightly bearish for the time being, given the persisting surplus compared to the 5-year average.



Source: US Stocks of Crude Oil Report and Petroleum Products – EIA

Concomitantly and with refining utilization rates weakening to 85.7% on the corresponding week, the main refining maintenance period of the year will certainly continue to weigh on gasoline reserves, yet, the surplus is unlikely to ease given that gasoline demand remains comfortably below supply.



Source: EIA, Oleum Research

Besides, in the last 10 years RBOB prices have been unfriendly for the month of October, declining in average 1.2%, sustaining our bearish view on the complex and on its proxy, SPGSHUP.



Source: Quandl, Oleum Research

Speculative positioning



Source: CFTC

Speculators reduced marginally their bets on Nymex gasoline futures on the week ending October 8, down 0.36% (w/w) to 52,223 contracts, the CFTC shows in its latest Commitment of Traders Report. Meanwhile, the SPGSHUP Index advanced marginally, up 0.39% to $942.86.

The slight decline in speculative bets has been mostly due to long liquidation, down 0.98% (w/w) to 118,035 contracts, but was partly offset by slim short coverings, down 1.47% (w/w) to 65,812 contracts.

Nevertheless and even if the sentiment remains oriented to the upside, short open interest is moderately stretched for past 3 weeks, evolving now at 18.72% versus an average of just 15.8% in the last 20-weeks. That being said and with short bets ticking up, headwinds are likely to return on the SPGSHUP Index.

Since the beginning of the year, net spec length on gasoline futures plunged 37% or 30,674 contracts, whereas SPGSHUP’s YTD performance lifted 21.21% to $981.28.

The fundamental picture of the complex is still under pressure, despite gasoline crack spreads and supply-demand balance improving

In the last month, gasoline cracks advanced steeply, up 61.37% to $8.49 per barrel and are now close to the $10 per barrel threshold, following the significant dip seen since the end of June. This appreciation comes broadly from weakening crude oil markets, impacted by mounting worries regarding global crude demand growth, following the long lasting trade dispute between China and the U.S.

Going forward, we believe that these worries will spread to the motorist blend, which should put additional pressure on the complex and its proxy SPGSHUP.



Source: Quandl, Oleum Research

Indeed and even if the gasoline supply-demand equilibrium enhanced, over the week ending October 4, reducing the oversupply by 65.11% to 292k barrels per day, the U.S. demand for gasoline is still low.



Source: Oleum Research

Besides, the significant contango seen in Brent futures fainted since our last publication, indicating that worries concerning undersupply blacked out. Nevertheless, futures still trade with a slight premium, indicating that there is additional space for a depreciation of RBOB prices.



Conclusion

That being said, we maintain our bearish view on the complex and the SPGSHUP Index, given that U.S. gasoline storage picture continues to evolve in a slight surplus compared to the five-year average.

Besides, the slim reduction of speculative bets, the persisting oversupply of American gasoline markets and the unfriendly price seasonality for the month of October contribute to comfort our view.

We look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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