Bearish Figures From DOE Wiped Out OPEC-Rumor Gains

Wednesday was a busy and volatile day of trading for energy contracts as some bearish figures from the DOE largely wiped out the early OPEC-Rumor gains, and created one of the largest divergences between gasoline and diesel prices of the past 10 years. The reversal pushed WTI and RBOB futures to fresh multi-month lows, and set the stage for a test of the $60 mark for WTI and $70 for Brent in the near future.

The EIA’s estimate of US crude oil production surged by 400,000 barrels last week, from what was an all-time high of 11.2 million barrels/day to 11.6 million. For perspective, that weekly increase amounts to roughly 40% of the anticipated drop in Iranian exports that had the market all stirred up for most of the summer. Of course the realities of the differing crude grades and transportation bottlenecks means the new US barrels can’t replace Iranian barrels so easily, but the raw number is another reminder just how efficient US producers have become in the past few years.

RBOB gasoline futures completed a 50 cent tumble in just 35 days, from a high of $2.15 Oct 3, to a low of $1.6382 on Nov 7. While we expect gasoline prices to drop in the fall due to the annual RVP transition, this year’s slide happened after both futures and spot markets had already made the switch to winter-grade products, making it especially remarkable.

You may have also noticed that RBOB and ULSD prices widened by more than 9 cents/gallon during Wednesday’s trading, pushing the “Heat to Gas” spread to levels not seen in almost 5 years, and taking back its status as a “Widow Maker” trade.

We’ve only seen ULSD trade 50+ cents above RBOB a handful of times in the past 13 years (since RBOB became the primary futures contract and usually those spikes are reserved for extreme winter weather events that create a spike in heating demand, which certainly isn’t the case today. If we do get a severe cold snap this winter however, with values already approaching record levels, it’s not hard to imagine the diesel premiums approaching all-time record levels, with $1/gallon spreads a distant but suddenly realistic possibility.

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