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Some Bad News: Refiners Switching to Summer Blend and Hedge Funds Go Short

We got some bearish news on oil this week. First, some refiners stated that they are switching to from summer to winter blend gasoline. Without naming which refiners were switching, Reuters noted that several major refiners had switched from producing summer blend gasoline to winter blend. (http://www.reuters.com/article/us-usa-gasoline-flows-idUSKCN1040G1)

Generally, summer blend is considered more environmentally friendly but is more expensive to produce. The U.S. government allows refiners to start selling winter blend on September 15th. Usually, refiners switch over production to winter blend in August. Currently, gasoline stockpiles are at their highest level in 25 years despite U.S. motorists setting record demand during the summer driving season. However, with so much supply overhang, we see refiners switching to winter blend earlier.

This does not bode well for large, integrated oil companies. Big Oil (Exxon, Total, BP) are integrated companies and they actually got a bit of a windfall when oil prices crashed because their refineries got better margins. BP reported second quarter earning this week, and noted that its in-house measure of margins stood at $10.70 a barrel, little more than half what it achieved between July and September of 2015. (http://www.bloomberg.com/news/articles/2016-07-26/oil-majors-lost-one-engine-now-the-second-one-is-sputtering)

Adding to the bad news, hedge funds also seem to be bearish on the price of crude. Hedge funds increased their short positions in NYMEX WTI futures and options from 53 million barrels on May 31 to 141 million barrels on July 19, indicating they anticipate a further drop in prices. (http://www.reuters.com/article/us-oil-global-kemp-idUSKCN1070M2).

Ty’s Take. As discussed last week, I do believe supply and demand will converge sooner rather than later. But I am worried that refineries are already switching over to their more profitable blend. That means they are tacitly acknowledging that there are plenty of gasoline inventories to get us through the September 14. Overall, that is negative for crude markets.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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Ty’s Take For the Week Ending 7-29-16
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