A Shift in Sentiment for October Gasoline Futures?

Gasoline Futures Outlook

This week's technical chart pattern and a slight change in the fundamentals may be indications of an impending shift in sentiment for October Gasoline futures. At the same time, the price action and fundamentals remain bearish for crude oil.

Further evidence that gasoline may be poised to rise while support for crude oil continues to erode was seen in this week's widening of the crack spread. The crack spread is a rough measure of the profit from processing a barrel of oil into gasoline. Just like some professionals trade the price differential between Brent Crude Oil and WTI Crude Oil, they also trade the relationship between gasoline and crude oil.

This week, the crack spread moved from $16.67 a barrel to $18.15 on August 6. On July 24, the spread was at $16.08. Its lowest level since February. This price movement also corresponds with the time period when stories started to circulate about a possible early shutdown for refinery maintenance.

Falling gasoline prices since late June have cut into refinery profit margins leading some to curtail production and shut down earlier than usual for maintenance. This should lead to a decrease in gasoline inventories, however, demand for crude oil should drop, leading to further increases in inventory and the possibility of lower prices.

This week, the Energy Information Administration (EIA) reported that gasoline inventories fell to 213.8 million barrels in the week-ended August 1. The week before the agency reported inventories had reached 218.2 million, the most since March. The EIA also reported that gasoline consumption in the four weeks ended August 1 rose to 9.05 million barrels a day.

The consumption figure shows demand for gasoline is strong. On the supply side, U.S. refineries operated at 92.4 percent of their capacity last week. This was down 1.1 percentage points from the previous week. The combination of these two events will likely help put in a bottom in the gasoline market. This bottoming action should show up on the daily and weekly charts this week.

Technically, on the daily chart the market reached a low at 2.5753. The main trend is still down, but the size of the reversal from this bottom is impressive. The first move from the bottom is usually short-covering, but the fundamentals are so strong that aggressive buyers may have already entered the market.

Upside momentum is expected to increase over the near-term which could lead to rallies through previous tops at 2.7085 and 2.7281. Trades through these levels will officially turn the main trend to up which could draw the attention of hedge funds and money managers, further underpinning the market.

The main range was formed by the June 23 top at 2.8969 and the August 5 bottom at 2.5753. This suggests that the minimum upside target is its retracement zone at 2.7361 to 2.7740.

Low gasoline prices and a late start to the summer driving season may be the factors driving up demand for gasoline, but this is what the market may have needed to stop the price slide. The strong demand coupled with lower production should lead to a rally in gasoline. The current chart pattern suggests that October Gasoline futures may be poised for a rally into at least 2.7361 to 2.7740 over the near-term.

Crude Oil Futures Outlook

The short-term outlook for October Crude Oil futures is not as friendly as gasoline futures. Oversold technical conditions may support a short-covering rally, and a rally in gasoline may entice some sympathy buying, however, the supply and demand situation remains bleak.

Hedge funds and money managers are closing out positions, driving prices lower along with the bearish fundamentals. In addition, having been burned in the past trying to trade the news, speculators have decided to back away from the long side of the market unless a geopolitical event has a direct effect on supply.

Although crude oil supplies dropped 1.76 million barrels the week-ended August 1, the supply at 365.6 million barrels remains too close to historical levels to generate buying interest.

Look for further downside pressure if refineries shut down as planned. This should lead to lower demand and increased supply for crude. The wildcard is gasoline demand. If consumers continue to increase demand for gasoline then inventories may drop faster than planned. Refineries may not be able to meet production demands which should be supportive for gasoline and bring speculative crude oil buyers back into the game in anticipation of greater future demand.