Many factors affect the spot market price, including local supply issues that occur when a terminal is temporarily or permanently shut down. The forward roll in either the pipeline cycle or the future contract used to index the spot value can also cause the spot ticker to seem an unreliable predictor.
Whether it’s a local supply issue or a pipeline cycle schedule, both represent a disruption to the spot-to-rack relationship. Pipelines move product from the refinery to the terminal, with pipeline operators typically moving batches during specific schedules referred to as cycles. Cycles typically run for ten days, and supply on a pipeline will take several days once injected into the line until it reaches terminals. Let’s say product is short during the current pipeline cycle, but a temporarily shut down refinery unit is scheduled to return during the subsequent pipeline cycle. The market’s tight supply disposition bids up the cash differential in the current cycle, and a short squeeze develops just ahead of the scheduling deadline that triggers a price spike.
As the new cycle begins, the refinery unit is returned to service. The cash differential that spiked the day prior moves sharply lower as the short squeeze ends, but suppliers at the rack continue to react to the stronger cash differentials from the earlier cycle and hold postings flat with the previous day. In this case, suppliers were responding to the immediate supply tightness — disregarding the new spot price which represents value for product with delivery a week or so away.
Another more routine dynamic impacting the spot-to-rack relationship is when the futures contract used to index the cash differential rolls forward by a month, which usually occurs alongside a pipeline cycle roll. This forward roll can have a dramatic impact on price when it occurs, especially if it marks a seasonal change. A couple of spot markets, such as Oklahoma’s Group 3 and the Portland, Oregon, markets typically wait until after the latest nearby delivery contract expires and for the new calendar month contract to take over as nearby delivery before rolling ahead. However, this is not always the case for these markets, while other markets will roll forward much earlier in the month.