U.S. gasoline heads for “epic summer”

Refinery outages in the U.S. and Europe and lower U.S. crude prices will support U.S. gasoline refining margins and enable traders to profit from rising U.S. gasoline futures, said Seth Kleinman, global head of energy strategy at Citi.

“U.S. gasoline looks fantastic – it is heading for an epic summer,” said Kleinman, speaking at the ETF Securities Investment Conference in London on Thursday. “Structurally it will be very supportive for the entire oil market.”

He said going long gasoline futures and short U.S. crude looked like one of the best trades right now.

Kleinman said Citi has liked summer gasoline since November 2011 due to the closure of three refiners on the U.S. East Coast.

“The loss of Petroplus capacity, along with the shut down of Hovensa, only makes the bullish case for summer RBOB more compelling,” he said.

Petroplus, Europe’s largest indepdendent refinery by capacity, is filing for insolvency and has already closed three of its five refineries. Hovensa plans to close its St. Croix refinery in the U.S. Virgin Islands in mid-February.

Kleinman said Valero had also indicated it might shut its Aruba refinery.

“These are all big refineries – Hovensa was one of the biggest in the world. The U.S is not going to be well supplied into the East Coast for gasoline.”

New York RBOB gasoline futures were trading at about $2.87 a gallon at 1451 GMT, having trended steadily upwards since late December.

Benchmark Eurobob gasoline in Europe has also been supported by refinery closures as the United States is structurally short of gasoline and relies on imports from Europe to fill the gap.

Eurobob barge prices are currently just shy of $1,000 a tonne fob ARA, whilst premium unleaded is trading at about $1,018 a tonne fob ARA.

The gasoline refining margin, or crack, which gives an indication of the profitability of refining one barrel of gasoline, rallied to over $10 a barrel last Friday after traders expressed fears of a shutdown at the ConocoPhillips Bayway refinery.

WTI/BRENT SPREAD

Kleinman expects the spread between U.S. crude and Brent to blow back out towards $20 a barrel again as U.S. crude prices come under pressure due to stock builds.

The Energy Information Administration reported on Wednesday that stockpiles at the Cushing, Oklahoma delivery point for the New York Mercantile Exchange’s oil futures contract rose by 1.48 million barrels to 30.12 million barrels week-on-week.

This has pushed the spread between the two contracts out to some $15 a barrel already.

Kleinman said a lot of crude is going into Cushing in anticipation of a reversal in the flow of the Seaway pipeline, which will take oil away from Cushing to the Gulf Coast.

“That’s why you’re seeing big builds there – we expect that to continue for the next few months and it will accelerate as refineries go into maintenance,” he said.

U.S. crude is also coming under pressure from production growth in North Dakota with the use of shale gas technology now being applied to oil extraction.

“What is going on there will change the world – it’s the death of the peak oil hypothesis,” Kleinman said. “The same companies that destroyed the natural gas market are now rolling into the oil market.”

On the natural gas side, Kleinman was sceptical that recently announced output cuts by Chesapeake will help the U.S. natural gas price recover from its current $2.385 per million British thermal units.

“We came out of the 2010-2011 winter, which was extremely cold, with record inventories,” he said. “It’s now incredibly mild in the U.S. at the moment – people are wearing T-shirts in New York. We need to see a massive pull back in production if storage is not to be tested to absolute capacity.”

Reuters