Will Higher Gasoline Prices Choke Off Strong Driving Demand?

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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

Gasoline demand in the United States four months into the year remains strong, running 6% above the five-year average although trailing the peak year in gasoline consumption achieved in 2007 by 0.7% when it averaged 9.286 million bpd.

A lot has happened in the nine years since the consumption rate hit the high watermark, with weekly data from the Energy Information Administration showing gasoline demand in 2007 consistently holding above 9.0 million bpd. Based on that measure, we’ll likely not see the 2007 record broken this year, with EIA statistics detailing three full weeks in January in which implied gasoline demand slipped below the 9.0 million bpd threshold.

It wasn’t immediately known that the United States slipped into what would become the worst recession since the 1930s during the final month of 2007 which would endure until June 2009, with the oil price bubble popping during the second half of 2008 after first spiking to record highs in July 2008. Job losses swelled, with the US unemployment rate peaking at 10.1% in October 2009, and gasoline demand averaging 8.997 million bpd that year.

Gasoline demand in the United States is elastic, and the job losses not only meant fewer commuters on the nation’s roadways, but also robbed the consumer of his and her confidence in the economy triggering conservation. Employment and gasoline demand remain closely correlated in the United States.

It would take six years before US gasoline demand would average more than 9.0 million bpd on an annual basis, with consumption in 2015 at 9.161 million bpd. Cumulatively through late April, preliminary data from the EIA shows gasoline supplied to the primary market running 365,000 bpd or 4.1% above the 2015 pace.

The national unemployment rate ticked up 0.1% in March to 5.0% with the uptick caused by more people looking for work as opposed to layoffs. In March 2015, the jobless rate was at 5.5%.

The US labor market has been a bright spot in an otherwise slow growth economy since the recession, with annualized growth up a meager and less-than-expected 0.5% during the first quarter, the Bureau of Economic Analysis reported on April 28, down from a 1.4% expansion for the fourth quarter 2015.

“Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed,” the central bank committee said in their news release on April 27 in concluding their two-day meeting discussing interest rates.

The market will get a better idea on that measure Friday (5/6) when the Department of Labor releases their non-farm employment report for April, with Labor previously reporting first quarter job gains having averaged 209,000 per month.

Low gasoline prices have been the other key component in spurring greater driving demand. Indeed, the US retail price average for all formulations of regular grade gasoline was 93cts or 28% lower in 2015 at $2.429 gallon than in 2014. At 9.161 million bpd, US gasoline consumption was up 240,000 bpd or 2.7% in 2015 from 2014, and at the strongest annual rate of demand since 2007.

However, West Texas Intermediate crude futures on the New York Mercantile Exchange are approaching $50 bbl after trading as low as $26.05 bbl on Feb. 11, and NYMEX gasoline futures have rallied 27% during the first four months of 2016, climbing 5% during the final week of April. Moreover, chart formations suggest gasoline futures, known as Reformulated Blendstock for Oxygenate Blending or RBOB, have more upside, with the May contract expiring April 29 at $1.6044 gallon.

Last reported at $2.162 gallon on April 25, EIA’s US retail regular grade gasoline price average is up 43.8cts or 25% from the 2016 low of $1.724 gallon plumbed on Feb. 15. The national average has more upside while consumers have less confidence in the economy. On April 29, the University of Michigan’s Index of Consumer Sentiment fell for the fourth consecutive month and to a seven-month low of 89.0 for April.

Will climbing pump prices prompt dour consumers to cut back on driving and slow the growth rate in gasoline demand? This feature will be closely watched by industry followers, with expected strong gasoline consumption in the United States a key component in bringing an oversupplied market into better balance with demand.

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