By Prieur du Plessis, on May 16th, 2011 posted in: Economy, Oil Leave your comment

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This post is a guest contribution by Dian Chu, market analyst, trader and author of the EconMatters blog.

The Reuters Jefferies CRB Index is down 8% so far in May with almost every single commodity in the index registering red. Even the ongoing geopolitical tension in the Middle East and North Africa has not been able to shield the ever bullish crude oil from the commodity rout. Both Nymex WTI and ICE Brent suffered heavy losses.

In the two weeks ending Friday, May 13, Brent dropped about 10% to close at $113.83 a barrel on ICE, while WTI plunged 12% to $99.65 a barrel at Nymex, and RBOB gasolne futures for June also lost 8% to around $3.0766 a gallon.

Although this week started off with some sign of stabilization, the heavy selling and volatility resumed mid week. The deep slide for commodities, including crude and gasoline, could be partly attributed to the reverberation from a recent wave of margin requirement increases amid volatility and price run-up in commodities.

CME Group already raised margin requirements on several energy products, and announced a second hike for gasoline futures effective Thursday, May 12. Increased margin requirement could trigger liquidation contagion as traders may need to sell their profitable positions in other commodities or equities to raise cash in order to meet the new limits.

Crude oil weakness also came from some bearish reports that hit the market this week. EIA data showed that gasoline inventories had its first weekly increase (1.3 million barrels) in about three months, while crude oil stockpiles continued to build. The IEA (International Energy Agency), citing “$4/gallon gasoline is likely to yield an anemic US driving season,” also said the oil demand in North America would fall by 194,000 barrels per day in 2011, a downward revision by 220,000 b/d.

The price tumble was big enough to trigger a five-minute halt in trading of crude oil, heating oil and gasoline for the first time in over two years on Wednesday. May 11 at CME electronic trading platform. .

With the record retreat in crude oil prices, many consumers are expecting ‘some big retail price drops’ in time for Memorial Day weekend. After all, crude oil accounts for more than two thirds (68.3%) of the price in a gallon of gasoline as of March 2011, according to the U.S. Energy Department.

Crude oil and gasoline prices typically trend in tandem on the same set of market fundamentals, but this time around, the decoupling of gasoline and crude oil would mean gasoline prices may be harder to drop.

MarketWatch reported that some refiners said their fuel sales in April had fallen by as much as 4% from March as high prices prompted consumers driving less. As refiners cut their run rate due to lower gasoline demand, the resulted sliding refinery utilization rate–82.8% as of April 29 as compared with 89.6% same period a year ago–has created a diverging supply side fundamental between crude oil and gasoline, which is more bullish for gasoline, and bearish for crude oil.

That is, while crude oil stockpiles continue to build pressuring WTI, gasoline inventories and are now 21.4 million barrels lower than a year ago and could dip below the normal range before the start of the summer driving season (see chart below). Days of gasoline supply also dropped to 22.9 days vs. 24.1 days from a year ago.

Another factor holding up gasoline prices is the flooding of Mississippi River. Rising water levels and heavy rains are causing fuel transportation disruptions in tankers, barges and pipeline closures, which reportedly has already contributed to higher pump prices in certain parts of the Southeast and Midwest regions. About 14% of total U.S. refining capacity is located in regions affected by the rising Mississippi River. Concern about disruptions of fuel helped boost wholesale gasoline prices.

Continue reading Slow relief at the pump as gasoline decouples from crude oil