Seasonality and Geopolitics in the Gasoline and Heating Oil Futures Market
In a typical year, gasoline prices tend to move lower after the summer as the peak driving season ends. Meanwhile, heating oil, a proxy for other distillates, including diesel and jet fuels, tend to be a more year-round energy product, exhibiting less seasonal volatility. Meanwhile, 2022 is anything but an ordinary year in the energy markets as the war in Ukraine, sanctions on Russia, and Russian retaliation continue to threaten crude oil and oil product supplies. As we move into September, gasoline prices are sliding more than heating oil futures, but we should not get too comfortable that the seasonal pattern will continue over the coming weeks and months.
Gasoline has declined more than heating oil over the past weeks
As we move into the fall months, driving tends to decline, gasoline demand decreases, and the fuel’s price drops. After reaching a record high of $4.3260 per gallon wholesale in June, at the start of the 2022 driving season, the price was below $2.40 per gallon in early September.
The chart highlights the sharp seasonal decline in gasoline prices to the lowest level since January 2022.
Meanwhile, heating oil futures, the proxy for distillate oil products, have also moved lower, but the price remains above $3.50 per gallon wholesale, a significant premium to gasoline’s price.
The chart illustrates that heating oil futures rose to an all-time peak of $5.2217 in April 2022, 89.57 cents above gasoline’s record high. At the $3.5780 level on September 2, heating oil futures were $1.1144 higher than gasoline as heating oil has held up better.
Seasonality has weighed on gasoline, but both oil products have declined. Meanwhile, geopolitics have caused different dynamics for gasoline and distillate prices.
Gasoline reflects WTI, while heating oil and distillates are more sensitive to Brent prices
Lighter and sweeter crude oil, with lower sulfur content, is the preferred grade of the energy commodity for processing into gasoline. Therefore, refiners process WTI into the fuel. Meanwhile, Brent crude oil, with higher sulfur content, is required for heating oil and other distillate refining.
WTI is North American crude oil and the benchmark for around one-third of the world’s petroleum. Brent reflects the price and grade of crude oil produced in Europe, Russia, Africa, and the Middle East. Brent is the benchmark for two-thirds of the world’s petroleum. The war in Ukraine concerns over Russian production and OPEC’s pricing influence have caused Brent to trade at a premium to WTI crude oil. Since distillates require Brent, heating oil rose to a higher record high than gasoline and continued to command a premium in early September. Seasonality and geopolitics support heating oil prices and weigh on gasoline.
The SPR releases will end in October
Crude oil prices have been slipping over the past weeks, weighing on oil product prices. Nearby October WTI crude oil was at the $86.87 level on Friday, September 2, with Brent crude oil for November delivery at $93.02 per barrel.
One of the factors weighing on crude oil is the Biden administration’s unprecedented US Strategic Petroleum Reserves release. At the end of 2021, the US SPR stood at 594.7 million barrels. As of the week ending on August 26, it was 24.3% lower at 450 million barrels. The administration has approved an SPR release of up to one million barrels per day through October 2022. Stockpiles are currently at the lowest level since the mid-1980s.
The SPR release has weighed on oil prices, but they will end next month, which could take the downside pressure off the energy commodity.
The war in Ukraine continues to rage, and Saudi Arabia may support cutting output
Russian production is falling, OPEC and the Saudis are considering production cuts, and US SPR releases are set to end. We could see crude oil find a significant bottom and turn higher over the coming weeks and by the end of 2022.
The war in Ukraine continues to rage as the winter approaches, posing energy concerns in Europe. The sale of nearly 150 million barrels of crude oil from the US SPR could cause the US to seek to replace those barrels, supporting the energy commodity’s price. Moreover, we are moving into the weak demand season for gasoline, the most ubiquitous oil product, which is a seasonal reason for crude oil to decline. However, we could see a significant rally in early 2023 or sooner as supply issues continue to dominate the market. The SPR release could turn out to be a short-term band aide for a long-term problem. Saudi Arabia and OPEC have become accustomed to high prices and will use the pricing power to boost prices over the coming months.
Oil and oil products could be closer to lows than highs for the coming months
Oil has long been a boom-and-bust commodity that takes the stairs higher and an elevator to the downside during corrections. In early 2022, the first major war in Europe since WWII caused oil to soar to its highest price since 2008, but it has been taking an elevator lower over the past weeks.
The price action in gasoline and heating oil provides a clue about the future path of least resistance of oil prices. In early September 2022, weakness in gasoline is seasonal, and US SPR releases are weighing on prices. Meanwhile, strength in heating oil and distillates, more year-round fuels that depend on Brent oil grades, signified that underlying supply concerns underpin prices. We could see some surprises in the oil and oil product futures markets when the US SPR releases end next month.
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