BLBG:Gasoline Tops Commodities as Oil Gain Spurred by Iran
Gasoline led commodities to a second quarterly gain as the stand-off with Iran sent crude prices to levels that prompted governments to consider releasing emergency oil stockpiles.
The auto fuel jumped 26 percent, the biggest advance in the Standard & Poor’s GSCI (SPGSCI) index of 24 raw materials, bolstered by Brent crude’s 14 percent gain. Goldman Sachs Group Inc. (GS) said gasoline prices are high enough to dent demand, heralding an 11 percent decline by the middle of the year. Soybeans and silver were the next-best performers during the three months. Natural gas fell the most, retreating 29 percent.
“Gasoline was the star performer,” said Michael Lewis, head of commodities research at Deutsche Bank AG in London. “Oil, largely driven by supply disruptions and political risk, is back on the agenda. Prices are moving toward levels that lead to demand destruction.”
The gains for gasoline underscore the challenge President Barack H. Obama is facing of minimizing fuel costs to motorists in an election year while pressuring Iran over its nuclear program. The “oil burden,” or the proportion of global gross domestic product taken up by fuel spending, is higher today than during the peak of the global financial crisis in 2008, the International Energy Agency said on March 20.
Iran Sanction
Brent climbed above $128 a barrel on March 1, the highest price since July 2008, as Western nations tightened sanctions against Iran, fanning speculation that governments may agree to free up stockpiled crude. The U.S. is weighing the option of using its Strategic Petroleum Reserve (DOESSPR), although no decision has been reached, Charles McConnell, U.S. acting assistant secretary for fossil energy, said at a hearing in Washington on March 27. French Prime Minister Francois Fillon told France Inter Radio two days later the prospects for a release are “good.”
The 27 members of the European Union, Iran’s (OPCRIRAN) single-biggest oil customer after China, have agreed to stop importing crude from the Persian Gulf state as of July 1 to help contain Iran’s nuclear program. Exports from the Persian nation have fallen to about 2 million barrels a day, from 2.6 million in November, and may slump by a further 1 million a day when the ban starts, the Paris-based IEA said on March 14.
The embargo sparked concern that Iran may respond by disrupting tanker traffic in the Persian Gulf. Officials such as Vice-President Mohammad Reza Rahimi have called for the country to block the Strait of Hormuz, the waterway through which almost 20 percent of the world’s oil supplies flow.
Hedge Funds
Hedge funds and other money managers have started to trim their bets on further gains in oil, suggesting the rally sparked by the Iran crisis is dissipating. Speculators have cut net-long positions in West Texas Intermediate, the benchmark U.S. grade, by 11.3 percent from a nine-month peak of 272,032 contracts reached on Feb. 28, data from the Commodity Futures Trading Commission show.
Gasoline surged even as consumption slumped, bolstered by the rally in crude and as refinery halts in North America and Europe raised concern that supplies may be insufficient for the April-through-September driving season. Retail gasoline demand was 5.7 percent less than a year earlier, the biggest annual decline for this time of the year, according to MasterCard Inc.’s SpendingPulse report on March 27. Gasoline ended the quarter at $3.3899 a gallon on the New York Mercantile Exchange, and traded today at $3.3997.
As much as 51 percent of refining capacity on the U.S. East Coast, the delivery point for supplies on which futures contracts are based, may be lost if Sunoco Inc. (SUN) proceeds with plans to mothball its 335,000-barrel-a-day Philadelphia refinery by July. Sunoco Inc. and ConocoPhillips (COP) have shut unprofitable plants in Pennsylvania representing 24 percent of the East Coast’s processing power, according to the Energy Department.
Supply-Driven
“The main reason for gasoline outperforming has been the whole refinery shutdown issue,” said Amrita Sen, a London-based analyst at Barclays Plc. “Everyone is very concerned about supply. This is very much a supply-driven story.”
The East Coast refining industry affects prices because New York Harbor is the delivery point for the benchmark reformulated gasoline blendstock, or RBOB, on which the New York Mercantile Exchange bases its contracts.
Capacity losses in the region have been exacerbated by the closing of plants in the Caribbean that supply gasoline into the East Coast. Hovensa LLC, a partnership of Hess Corp. and Petroleos de Venezuela SA, shut its 350,000 barrel-a-day St. Croix refinery in the U.S. Virgin Islands in February. Valero Energy Corp. (VLO) said March 28 it halted its 235,000 barrel-a-day Aruba facility because of “unfavorable profit margins.”
Risk to Economy
The jump in retail gasoline prices is feeding into inflation, with the U.S. consumer-price index climbing 0.4 percent in February, the Labor Department reported on March 16.
“The price of oil itself at current levels is becoming a risk to the economy, and there is already evidence that U.S. gasoline demand has weakened in response,” Jeffrey Currie, head of commodities research at Goldman Sachs in London, said in a report March 28. The bank predicts that gasoline will drop to $3.02 a gallon in three months.
Still, fuel prices are eating into Americans’ incomes half as much as in 1981, the last time Iranian shipments were disrupted. The cost of a barrel of crude in the U.S., adjusted for total disposable income, was $107.92 in January of this year, compared with a peak of $213.44 in the same month in 1981, according to data compiled by Bloomberg and the Energy and Commerce Departments.
Worst Start
The S&P GSCI rose 6.8 percent to 688.71 in the quarter through March 31. The gauge’s gain, its worst start to the year since 2010, compares with an 11 percent increase in the MSCI All-Country World Index (IACWE) of equities.
Silver’s gains were bolstered by the metal’s appeal as a hedge against inflation. Silver holdings in exchange-traded products are up 2.7 percent this year. The metal ended the quarter at $32.484 an ounce in New York.
“There is a lot of investor sentiment that is holding up silver, but the industrial side of it is still a small component,” Jeremy Baker, the manager of Harcourt’s Belvista Commodity Fund, part of the Vontobel group, which oversees about $50.5 billion in assets, said by phone from Zurich.
Soybeans climbed 16 percent after drought damaged harvests in South America, the biggest growing region, and China agreed to buy as much U.S. supply in one week in February than its own farmers produce in a year. It ended the quarter at $14.03 a bushel on the Chicago Board of Trade, having jumped 3.5 percent on March 30 after the U.S. Department of Agriculture said plantings may fall to a five-year low.
Running Out of Steam
“Steam is potentially running out of some of these commodities,” said Baker, who manages $925 million at Belvista. “It was clearly a liquidity-driven rally. There seems to be a divergence with the physical and anecdotal evidence that’s coming out of China.”
Goldman Sachs cut its three-month outlook on commodities to neutral from overweight on March 28, saying that most raw materials reached targets after gaining and economic growth may soften in the next quarter. China, the U.S. economy and tension in the Middle East are three key risks to raw materials, the bank said in a report.
“It’s on a knife-edge,” said Leo Drollas, chief economist at the Centre for Global Energy Studies in London. “We’re in the danger zone already, quite heavily. Economic growth will stutter globally. Europe is in the doldrums, the U.S. is recovering but it’s precarious. China’s not growing as rapidly.”
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net Barbara J Powell in Dallas at bpowell4@bloomberg.net
To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net
