A month in front of the Labor Day holiday in the U.S., the unofficial end of the peak summer driving season, gasoline demand spiked from what has been lackluster consumption this summer, with preliminary data showing a surge in demand to the highest weekly rate so far in 2014.
The Energy Information Administration said gasoline supplied to the primary market jumped 353,000 bpd to 9.359 million bpd during the week-ended Aug. 1, and flipped the four-week average from a 1% decline against year prior during the preceding period to a 0.3% gain through Aug. 1. The rebound came as many in the market gave up on a strong season for gasoline demand, selling out of the gasoline futures contract traded on the New York Mercantile Exchange.
In charting the choppy EIA implied gasoline demand figures, one might be reminded of the 1979 classic movie “The In-Laws,” when Peter Falk’s character, Vince Ricardo, yells to Sheldon Kompett played by Alan Arkin, “Serpentine, Shelly, serpentine!” as the mild mannered dentist attempts to elude a host of unsavory characters. Falk’s character, a CIA agent, upended Arkin’s life when his daughter engaged the risk taking Ricardo’s son.
Does the demand rebound have legs? After all, gasoline demand entered summer like a lion, but has been on the lam(b) through much of July, if you’ll allow for the pun.
The EIA data also detailed a two million bbl drawdown in domestic gasoline inventory which fell to a better-than one-month low at 213.8 million bbl. The draw pressed gasoline supply below the five-year average even as production surged 422,000 bpd to 9.759 million bpd—the second highest weekly output rate for U.S. refiners of the year.
Released Aug. 6, the EIA report reversed a lower trending NYMEX Reformulated Blendstock for Oxygenate Blending futures contract from a $2.6983 gallon six-month low on the spot continuation chart. Despite the reversal, RBOB futures held below $2.80 gallon through the first full week of August since September delivery rolled in as nearest delivery.
A very strong run rate by refiners looks ready to give way to lower utilization. After holding above 90% since late June, including two weeks in July at a 93.8% eight-year high, the refinery run rate is set to ease as some refiners move units into early seasonal maintenance. The market has fixated on the Coffeyville refinery in Kansas, where the 115,000 bpd refinery operated by CVR Refining was forced shut by a fire July 29. The refinery, which is connected by pipeline to the Cushing supply hub in Oklahoma, is expected to remain shut until late August.
Geopolitical risks abound, although the market has taken increased violence in the Middle East and in eastern Ukraine in stride. U.S. fighter jets bombed artillery positions held by the radical Islamic militants in northern Iraq Aug. 8, as they threatened Kurds and were seen on the verge of slaughtering thousands of Christians trapped atop of the Sinjar Mountains. The market initially rallied on the latest advance by ISIS, which captured the oil city of Kirkuk, a dam in Mosul, and prompted some oilfields in the area to shut-in production. However, the U.S. involvement flipped from short-covering gains to profit-taking losses as sentiment concluded U.S. involvement in Iraq would diminish the likelihood of oil supply disruptions.
Wide ranging geopolitical threats to oil supply remain however, although they are counterbalanced by their potential to also retard economic growth. A fragile euro zone, with Italy slipping into recession in the second quarter, has capped the upside in global oil prices. The Organization of the Petroleum Exporting Countries in their Monthly Oil Market Report released Aug. 8 said oil demand in the U.S. “remains strongly dependent on the development of the U.S. economy.”
Gasoline demand in the U.S. has trended down since 2007 due to several factors. The primary reason for lower consumption has been greater vehicle efficiency. Earlier this month, researchers at the University of Michigan Transportation Research Institute reported the average fuel economy—window sticker values—of new cars, light trucks, vans and sport utility vehicles sold in the U.S. in July was 25.6 miles per gallon, up 0.1 mpg from June and just 0.1 mpg shy of the revised record set in May.
Vehicle sales have made a strong comeback since the Great Recession, with pent up demand bolstering buying. Considering vehicle fuel economy for new vehicles sales is now up 5.5 mpg from October 2007, the first full month of monitoring by UMTRI researchers Michael Sivak and Brandon Schoettle, we should expect stingy growth in U.S. gasoline demand to continue.