Just a Tryst, or have Americans again Fallen in Love with the Automobile?

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

Now that we’re in the peak driving season in the United States, early year prognostications for sharp growth in gasoline demand are under review, and preliminary data does show greater gasoline consumption as lower fuel prices spur consumer’s road travel.

Indeed, lagging indicators show what many analysts had previously forecast—that US gasoline demand is elastic, and lower retail prices would prompt American drivers to discard conservation and spend more time behind the wheel. And what they’re driving are larger vehicles that consume more fuel, with recent monthly automobile sales dominated by consumer purchases of sports utility vehicles and pickup trucks.

Released in late June, the Federal Highway Administration reported a 3.9% jump in vehicle miles traveled on US roads in April from 12 months earlier, equating to 10.2 billion more miles traveled. All regions of the country showed higher VMT compared with April 2014, when the Energy Information Administration reported the US average retail price for regular grade gasoline averaged $3.661 gallon compared with $2.469 gallon 12 months later.

Gasoline supplied to the primary market registered its second highest weekly rate in 2015 through June 19 at 9.655 million bpd, and averaged 402,000 bpd or 4.5% above a year ago during the four weeks ended June 19 at 9.352 million bpd, the latest available data from the EIA shows. Implied demand in 2015 through June 19 averaged 8.985 million bpd, 3.5% greater than year prior, and close to matching the cumulative demand rates for the first nearly six months in 2010 and 2011.

Expectations continue that gasoline demand would accelerate over the next couple of months. AAA Travel projects the most holiday travelers in the US since 2007 for the Independence Day weekend, calling for 35.5 million Americans to drive 50 miles or more.

The Paris-based International Energy Agency also cited strong US gasoline demand amid lower oil prices that has outpaced previous forecast in its Oil Market Report for June, contrasting with demand elsewhere around the globe.

“It is only really in the US where the price effect has appeared to play a greater role than previously forecast,” said the watchdog for energy consuming nations. “[G]iven the lack of currency-effects or high retail taxes in the US, consumers there are exposed to a greater share of lower crude oil prices than in most other countries.”

The IEA said it took until December 2014 for US oil demand to show a marked change in growth, with US gasoline prices down approximately one-third between June 2014 and December. This compares with equivalent domestic currency gasoline price declines of 13% in Germany, 10% in the United Kingdom, and 8% in Japan.

“The traditionally more price-responsive gasoline and jet/kerosene segments led the upside, respectively rising by 3.4% and 3.7% in 1Q15,” said IEA. “US vehicle mile travelled statistics, from the US Department of Transport’s Federal Highway Commission, neatly encapsulate the increased willingness of US drivers to put additional ‘miles on the clock’, up 5% y-o-y in December and 3.9% in 1Q15.”

There is a fly in the ointment however, with nearest delivered IntercontinentalExchange Brent crude futures up more than $20 bbl from January lows, with US gasoline prices guided by the Brent contract. The rally in crude prices has been underpinned by expectations the low price environment would both reduce drilling and lower domestic crude production while stimulating demand for fuel. As markets frequently behave, they might have overreacted to the upside that could pressure demand growth going forward.

“Futures markets are currently pricing in further crude oil price gains through the end of the year. If forward prices prove right, there could well be reduced support for demand in 2H15,” suggested IEA.

New York Mercantile Exchange RBOB (reformulated blendstock for oxygenate blending) futures, currently in seasonal backwardation, rallied to a $2.1858 gallon 7-1/2 month high on the spot continuation chart on June 17. That’s a gain of 95.93cts or 78.2% from the $1.2265 gallon low established January 13.

Gasoline futures typically rally from winter lows to late spring highs, with the advance driven by seasonal refinery maintenance that lowers gasoline output, and the change in fuel specification to the environmentally more stringent summer grades. Traders also pile in during the period on expectations for greater demand during the summer months.

So, at this point, will the RBOB contract again rally after dropping back late June to roughly $2.05 gallon? Probably not, with the June 17 high likely to become the 2015 high unless gasoline demand growth spikes from the already strong consumption rate, or we experience significant supply disruptions.

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