Publications: Notes at the Margin

The Prompt (Hoarding) Premiums; The Delta Hedging Impact on Oil Prices; California's EV Depression of Gasoline Use (March 28, 2022)


This Notes at the Margin addresses three topics. The prompt premiums refiners and consumers are paying for crude oil, gasoline, and distillate are the primary focus. We estimate that the prompt (or hoarding) premiums have added $12 per barrel to the price of Brent, $12 per barrel to the price of WTI, $250 per metric ton to the price of gasoil, $0.10 per gallon to the price of gasoline, and $0.80 to the price of diesel or low-sulfur distillate.


These premiums are vulnerable to a large release of strategic stocks, although we deem such a release unlikely because energy policy officials lack the market understanding found at central banks.


We begin, though, by examining the impact of changes in the number of futures held to remain delta neutral on crude oil prices. The data reveal that the R2 in a regression of the change in the price of Brent futures and the change in the number of contracts required to remain delta neutral is 0.96. It drops off a little for the June and December futures contract but remains high.


Now, as we note, the sample is small. We will continue to follow the evolution of the June and December contacts. The evidence, though, is that Javier Blas was correct when he wrote that “Wall Street was about to take the oil market on a wild party.” It is clear today that the increase in price volatility can be attributed to the gamblers playing at the commodity casino’s oil table.


Futures exchanges will transition from trading May 2022 options to June 2022 options in the next week. The shift may increase the activity associated with options hedging because the June futures market is twice the size of the May market, and volatility could rise in concert.


The final item in our report is our analysis of California and Texas gasoline consumption in which we compare changes in use from one month to the next with changes in vehicle miles traveled. The exercise suggests that the relationship that held in California from 2013 to 2018 has broken recently, possibly due to the wide adoption of electric vehicles (EVs) in the state. No such change took place in Texas. Our conclusion is that the purchase and use of EVs cut gasoline use in California by around seventeen percent from the levels that would have been consumed based on miles traveled.


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