As revealed by the recent disruptions from refinery closures, pipeline limitations and problems with barge delivery induced by Hurricane Harvey in the U.S Gulf Coast, there is an embedded premium in holding a physical commodity as opposed to a futures contract.
The refinery shutdowns had impacts, particularly on the September nymex gasoline futures, which jumped to two-year highs.
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A mini- price squeeze has occurred and forced the “shorts” – the selling side of the NYH Gasoline futures contract that needs product to satisfy its obligation – into offsetting their futures position at higher prices.
In very simplistic terms, what Wall St. do in the commodity market is selling umbrellas or life insurance policies on contracts.
GOLDMAN: -“Harvey’s damage to America’s oil industry could last several months”.
Net Position on NYH Gasoline Contract, CFTC
M(S, K, ?, r, ? )
The market went from 20,000,000 barrels net short position in July to 50,000,000 barrels long in the last decade of August- This has in turn drastically challenged the moneyness(-i.e probability of exercise, relative position of the underlying) of some of WS’s most underwritten energy contracts on gasoline and refined products.
Shorting the Gasoline in the volatility space seemed to be very expensive: implied vol was one of the highest in Commodities and risk reversals were at the highest.
The skew-to-ATM forward volatility ratio has been rising steadily since the mid-summer, likely related to Wall-Street hedging bullish RBOB book and reflecting the gigantic number of investors, small and large who were long gasoline at the end of July.
One friction for refiners and merchant traders performing risk management was that cost to insure a portfolio against a fall in gasoline markets had now reached an all-time high.
One October NYH Nymex RBOB gasoline futures= 42,000 U.S Gallons.
For example, if IV is 59% on the $73,500 underlying, that tells us that a “one sigma move”, ?, is + or – $43,000 for the period.
These volatility parameters favor structures that sell top side skew to cheapen up gasoline exposure.
Moreover, compared to the mini-squeeze in the September contract, RBOB calendar spread (1st-month/2nd month) has tumbled to its historical average…
This magnitude of the shift in the time-structure is particularly eloquent but not surprising.- As I previously postulated, the liquidity has shifted to the U.S Gulf Coast:
“In the New York Harbor, inventory storage deals are financed because of the NYMEX EFP connectivity. This banks financing is contingent on the ability to deliver the products on Nymex facilities located in New York Harbor. As a result, European traders are swamping New York Harbor” and the liquidity has shifted to the Gulf Coast.”The NY-Harbor relative relevance is now reduced to time-spreads.”1
This thesis remains, to me, valid in 2017-I could only remotely stick the Gulf gasoline into the Nymex NY Harbor-linked gasoline contract in the recent months, its time-structure remains convenient to express my views.
Has the embedded premium in holding the physical commodity as opposed to forwards and futures increased or decreased ?
This should be the focal point whether if you hedge, produce or trade a commodity to make money.
Was the supply chain re-established with less or more expansive gasoline components – the higher RVP, the more vapor the fuel emits. If so, banks umbrellas would be on safe harbors since blending CBOB into high-rvp finished gasoline is less expansive.
Motivated by the supply disruptions of Hurricane Harvey, the U.S Environmental Protection Agency (EPA) has waived its emission rules, effectively declaring an early end to summer regulations requiring refiners to use low-volatility gasoline conventional gasoline (CBOB) and Reformulated Gasoline (RFG) during the summer months..
i.e, granting the options for refiners to produce the gasoline blend with whatever blendstocks, wherever, whenever it is optimal to do so.
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