Gauging Supply and Price with DTN’s National Rack Average
By Brian Milne, Editor DTN MarketWire™
"The trend is your friend" is a common adage recited frequently by experienced commodity traders, noting that the market is traditionally in either an uptrend or a downtrend 80 percent of the time. While this does not mean that prices in an uptrend, for instance, will increase consistently every day, it does indicate an upward bias. Knowing when to reposition ahead of a change in trend amid the many false whipsaw price reversals that are a hallmark in energy futures trading is, of course, critical for these market participants.
Following the trend in RBOB gasoline futures and heating oil futures that trade on the New York Mercantile Exchange is an excellent leading indicator on the near-term direction for gasoline and diesel fuel rack postings. RBOB gasoline futures are used to index gasoline in spot trading, with heating oil futures the benchmark for spot ultra-low sulfur diesel, low sulfur diesel, jet fuel and heating oil. Spot price will direct rack postings.
Although taking direction from futures and spot, prices posted at wholesale distribution terminals will closely reflect the competition among multiple suppliers, in most cases, that will be dependent upon local supply-demand factors. Rack postings, which represent a wholesale market in refined fuels closest to retail, are what suppliers are actually selling their product for each day, with suppliers required to react to the nuances of a local market despite what may be happening in New York City trading pits. As a result, they are a far better indicator of localized consumption patterns.
In comparison, the futures price reflects the value of hedges on product yet to be delivered along with what speculators deem the value to be, with the latter usually the driver in futures price and volatility.
Looking to project out local supply-demand factors on a broader scale, DTN took the rack postings for all formulations of regular grade gasoline and crunched the data to create a national gasoline rack average, as well as creating a national rack average for distillate fuels by averaging out rack postings for ULSD, LSD and heating oil grades of distillates across the country. We then monitor the price differential between the rack average and their respective futures contract, which captures the difference in value between two types of wholesale markets for the same product.
The strengthening or weakening of the differential between rack values and futures offers an idea of supply conditions. This relationship is especially important in the refined fuels markets, where physical supply conditions might be overlooked by speculators in the futures market. As it implies, the futures market is looking ahead at a host of issues that, at some point, might impact supply and demand, generally focusing on national or global events.
Combined national rack average
By combining rack averages nationally and comparing against the financially settled futures price, we are seeking a barometer reading of the health of physical supply across the country. The rack-to-futures differential will offer an idea on whether futures are overvaluing or undervaluing real-time physical supply, which will provide a guide for near-term price direction for rack postings.
To illustrate this scenario, we have charted the price differential between DTN’s national distillate rack average and nearby delivery heating oil futures. The differential posted a near three-month high just ahead of Thanksgiving at 31.12cts over nearby delivery heating oil futures, more than triple its 9.04cts value on Sept. 15, which marked a seven-month low.
What changed?
Total stocks of distillates have fallen since Sept. 30
Domestic stockpiles of distillate fuels increased for nine consecutive weeks from Aug. 5 to a seven-year, ten-month high on Sept. 30 at 151.5 million bbl, according to statistics provided by the Energy Information Administration. Since Sept. 30, total stocks of distillates have fallen for eight consecutive weeks to a 132.8 million bbl near four-month low, drawing down supply by 18.7 million bbl or 12.3 percent. More to the point, a 23.0 million bbl or 17.9 percent year-over-year surplus in total distillate stockpiles measured on Sept. 30th shrunk to a 1.2 million bbl or 0.9 percent surplus against the comparable year-ago total as of Nov. 24. The year-over-year surplus contracted by a significant 21.8 million bbl or 94.8 percent during the two-month period.
| DTN: 9110 West Dodge Road Omaha, NE 68114 www.dtn.com |
DTN Ethanol Center: Customer
Service:
|
24-hour
DTN Guardian3 Support: Sales: |