- WTI slides nearly 5% as post-Brexit rally subsides
- EIA report Thursday will be pivotal for next move
- RBOB gasoline could prove key after biggest one-day drop since February
- Refining margins slump on sharply narrowed RBOB futures/WTI spread
- Spread 54% lower than the year-ago period
Oil is under pressure as refiner margins take big hit
from slump in RBOB gasoline futures. Photo: iStock
By Ole Hansen
Crude oil has returned to the lower end of its established range with increased macro uncertainty raising concerns about demand at a time where supply disruptions continue to fade.
Short-covering was the main reason behind the post-Brexit rally and with that now out of the way, the market once again is focusing on other drivers such as the continued weakness in gasoline, a key driver for crude oil demand.
WTI crude oil looking for support at $45.80/b with a break below targeting $44.50/b
In the weeks leading up to and in the imediate aftermath of the Brexit vote, hedge funds had been increasing the short base on the rising assumption that crude oil would struggle to move much above $50/barrel at this stage.
During the week ending June 28, i.e. the week covering the Brexit vote, hedge funds increased the gross short position by 26% to a three-month high. The risk-on that followed triggered a sharp short-covering phase which took WTI back to, but not above $50/b.
Yesterday WTI fell by almost 5% as the dollar rose and equities dropped on renewed worries that the Brexit result can cause a ripple effect and negatively impact global growth and subsequent demand for oil.
Hedge funds increased short positions (red line) in WTI by 26% during the week of the Brexit vote.
The weekly US inventory report from the EIA has been delayed until Thursday due to the Fourth of July celebration on Monday. One of the key data points to keep an eye on is the level of gasoline inventories.
The past couple of weeks have yielded two counter-seasonal rises and this development has increasingly been putting RBOB gasoline under pressure. Yesterday the RBOB futures dropped by the most since February 16 amid a record level of inventories building up on the US east coast.
Refineries are currently "enjoying" the worst margins on the refining of gasoline in several years. The current spread between WTI crude oil and RBOB gasoline has slumped to $13/b, some 54% below the level for this time last year.
High gasoline inventories and the passing of the peak of the US driving season are likely to keep margins under pressure and with that, crude oil will be struggling to perform in the short term.
In other words, the gasoline component of tomorrow's inventory report is likely to attract above normal attention with surveys pointing towards a decline between 500,000 and 1.2 million barrels.
— Edited by Martin O'Rourke
Ole Hansen is head of commodities strategy at Saxo Bank