Oil & Gasoline Market Summaries – 1st August 2014

Gasoline Futures

Nearby Gasoline futures continued their sell-off this week. The market is now trading below 2.8261, or less than 62% of its 2014 range. The catalyst behind the selling pressure is increasing gasoline stockpiles. The relatively limited gasoline demand is the fundamental force driving gasoline prices lower.

The futures chart indicates downside momentum is increasing. This may mean lower prices over the near-term. The chart indicates the 2.7500 to 2.7000 area may be the best target.

This week, the Energy Information Administration (EIA) reported that gasoline stockpiles grew by 400,000 barrels to 218,236 the week-ended July 25. This was the highest level since mid-March. This kept gasoline inventories in the upper half of the five-year average range. Supply at the New York Harbor is at its highest seasonal level since 2008 according to the EIA. All of these factors are contributing to lower gasoline prices. The nearby futures daily chart shows gasoline prices at their lowest level since early April.

Supporting the idea that limited gasoline demand is the driving force behind the increased supply was the EIA's Total Motor Gasoline Supplied figure. This EIA measure of consumption averaged 8.9 million barrels a day for the past four weeks. This is down by close to 1% over the same period a year ago.

Gasoline prices are expected to continue to decline as inventories rise. According to AAA, the current national average pump price per gallon of regular gasoline is $3.513, down from $3.558 a week ago and down from $3.676 a month ago. This may have an effect on U.S. producers such as Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and Continental Resources Inc. (CLR).

Crude Oil Futures

Crude oil demand from refineries has been increasing, but prices continue to fall because this does not represent "growth demand". This week, the EIA reported that U.S. commercial crude inventories decreased by 3.7 million barrels the week-ended July 25. The total U.S. inventory was 367.4 million barrels. This was in the upper half of the five-year range for this time of year.

Besides the increasing gasoline inventory, another factor hurting prices may be rising crude imports. During the report period, crude imports averaged more than 7.7 million barrels a day, up about 300,000 barrels a day over the previous week.

The Nearby Crude Oil Chart suggests the market has more downside potential. The key area to watch for support is the 50% to 62% retracement zone formed by the 2014 range. This zone is $96.79 to $94.54.

Summary

Besides the traditional supply/demand fundamentals, the lack of concern for the geopolitical events is also helping to exert pressure on crude oil. Speculators are not reacting at all to the geopolitical events at this time since the problems in Ukraine and Gaza are not having an immediate effect on supply. Traders are also taking a "wait and see" approach to the new sanctions imposed on Russia.

The oversupply and the lack of concern over the geopolitical events are encouraging liquidation by money managers and commodity funds. This action is going to continue until the market reaches an oversold level and runs out of sellers. At that point, the bargain hunters will step in to stop the slide. Until then, look for more selling pressure.

The bottoming action may come sooner-than-expected for gasoline traders. Poor demand for gasoline and high inventories may be helping to keep prices down at the pump, but they are also hurting profit-margins. Because of this, refineries may decide to cut production or start maintenance early. This may help stabilize gasoline prices, however, it would also reduce crude oil demand which could put additional pressure on prices.

Over the near-term watch for gasoline prices to begin to bottom out, but crude oil may not reach a bottom until prices reach the $96.79 to $94.54 zone, or about $2.00 to $4.00 below current price levels.