Easing the oil glut

With all the talk of increased oil production coming out of the US, you could be forgiven for thinking that the price of a barrel of oil could be a lot cheaper.

Most recently crude has been hovering just north of $100 p/barrel on the back of a string of larger than expected inventory draws.

As supply increased, it was a lack of intrastructure that lead to a glut at Cushing and pushed the Brent/WTI spread out to $20 earlier in the year.

As supplies become more available, we've seen refiners really ramp up production recently. This is also in-line with what we'd expect in the US summer which is the peak driving season.

But now with the added output that glut has now turned to gasoline. The average price for regular gasoline at U.S. pumps fell 7.61 cents in the past two weeks to $3.5985 a gallon, according to Lundberg Survey Inc. Similarly RBOB futures have been selling off heavily for the best part of a month.

The Environmental Protection Agency said Aug. 6 that refiners and blenders would have four extra months to meet this year’s requirement to blend 13.8 billion gallons of ethanol into gasoline under the 2007 Renewable Fuels Standard. The EPA also announced that it “anticipates proposing adjustments” to next year’s level, which is set to reach 14.4 billion gallons. This has the effect of reducing the price of RIN's and therefore gasoline.

With the Middle East also stabilizing and an extreme net long position in crude in the most recent COT report, I think it's fair to say that we can be cautiously bearish on both crude and RBOB in the short term.