BofA Stunned By Drop In Gasoline Demand: "Where Is Driving Season?"

Exactly six months ago, when oil bulls still held on to some fleeting hope that OPEC may somehow stabilize the crash in oil prices despite the shift in marginal oil production from low-cost OPEC producers to US shale (a hope which is now gone as the just disclosed letter from Andy Hall demonstrates), Goldman noticed something troubling: an unprecedented collapse in gasoline demand. As the firm's energy analyst Damien Courvalin said on February 8, when discussing the 6% fall in US gasoline demand, such a plunge "would require a US recession" and add that "implied demand data points to US gasoline demand in January declining 460 kb/d or 5.2% year-on-year. In the absence of a base effect, such a decline has only occurred in four periods since 1960 during which time PCE contracted."

Now, 6 months later, the situation is very much different: with the US now inside peak summer driving season, the cyclical drivers behind gasoline supply and demand are vastly different, and yet something has remained the same: gasoline demand in the US simply refuses to rebound, surprising analysts by how weak it is. So weak, in fact, that Bank of America has released a note which, like Goldman half a year ago, reveals confusion about why - if the economy is indeed strong -  demand hasn't kept up and has prompted BofA's energy analyst Francisco Blanch to ask "where is the driving season?" and, more specifically, "is this year's driving season over before it began?"

Here's why some of the biggest banks continue to be amazed at the relentless failure of gasoline demand to validate an economic recovery, courtesy of BofA:

Gasoline demand is extremely price-elastic

 

In a U-turn from the last two years, when demand growth for gasoline was running at phenomenal speed, gasoline consumption in the Atlantic Basin has fallen by 1% on last year. In the US, lower demand growth seems largely a function of higher retail gasoline prices, underscoring how extremely price elastic oil demand is (Chart 1). Annual growth in miles driven has slowed to 1.5% from 3.4% in the same period last year. Higher prices are turning people back on to smaller and more fuel-efficient cars, reviving the well-established trend prior to 2015. Sales growth for SUVs, which averaged 7% YoY in 2016, has now slowed to 2%, allowing fuel efficiency gains in the US fleet to come through more forcefully (Chart 2). More recently, slowing employment growth, as well as a slowdown in construction activity, may have also played a marginal role.

 

 

 

Is this year's summer driving season over before it began?

 

But the latest weekly data is somewhat disconcerting. Despite a sequential pick-up, gasoline demand is 180 thousand b/d, or 1.8%, down on the same four-week period last year. Gasoline demand in the US tends to reach a peak around the July 4th weekend, when Americans drive for pleasure, and then declines sharply between mid-August and late September, which is what creates the seasonality in the gasoline futures curve. But, increasingly, one has to wonder whether the summer driving season is already over before it has even begun (Chart 3)? Indeed, RBOB gasoline relative to US diesel prices has collapsed in recent weeks and is now trading near parity (Chart 4).

 

In other words, while the reasons may be different, the structural gasoline demand malaise that was first observed in the start of the year has persisted half a year later. Who knows: maybe, just maybe the failure of oil prices to stage any rebound just might have something to do with this lack of end demand.

Big picture considerations aside, Bank of America sees little - if anything - to be excited about in gasoline's near-term and no to near-term future, mostly as a result of gasoline demand weakening not only in the US, but also globally, with distillates close behind:

While the gasoline market may find some temporary support on a demand improvement, elevated exports and inventory declines, we still see little structural tightness ahead. This year has seen a number of gasoline-geared refinery expansions in Asia, which is supporting gasoline supply. At the same time, the price-driven boost to demand is disappearing, with gasoline demand weakening globally, while distillate demand growth may play catch up. On our estimates, global gasoline refinery utilization rates are set to fall quite sharply this year and in 2018, likely taking the wind out of the sails behind gasoline cracks (Chart 26). In our view, winter gasoline cracks are likely to see further downside. True, crack timespreads currently stand at the bottom of the range, but should weaken post summer (Chart 27). Gasoline cracks are likely to see further downside and we expect diesel to reclaim a more typical pronounced premium to gasoline this winter.

 

The bad news is not over, however, as "any mid-to-late-summer rally in gasoline, if it materializes, is unlikely to be sustainable. Simply because there is a lot of work left in draining gasoline inventories before the end of the driving season. Contrary to common wisdom, gasoline stocks are anything but tight in the Atlantic Basin, even relative to both demand and exports. Flagging refinery utilization rates in places like LatAm or Africa have increased demand on other regions to run harder, in part explaining why US crude runs recently pushed to a record level, while European runs are also elevated. After the summer, gasoline cracks are likely to see further downside and we expect diesel to reclaim a more typical pronounced premium to gasoline this winter."

And while the future for RBOB is certainly not bright - especially now that even the biggest crude bulls have thrown in the towel - with a new deflationary wave likely imminent and set to spoil the central banks' reflationary party yet again, a bigger question, as both Goldman and now BofA pose, is what is going on with gasoline demand: is it more efficient cars, is it a reduction in miles driven, or is it simply that the US consumer continues to contract, between declining real wages and deteriorating labor market conditions, with gasoline demand just one of the very few undoctored indicators giving a glimpse into the true state of US consumption?

Whatever the answer, the same stagnant demand that stunned Goldman in February is now "shocking" Bank of America. At what point will these, and other banks, finally connect the dots that this is not some "one-time, non-recurring" event.

Comments

Sonny Brakes ebworthen Sat, 07/08/2017 - 19:16 Permalink

If you're not building and repairing infrastructure you're not using diesel fuel for heavy equipment, the bosses aren't driving brand new company trucks (gasoline), the workers aren't traveling to the construction site, carpenters aren't driving nails into lumber, the coffee truck isn't selling anyone sandwiches, the workers aren't going to the pub for a beer after work on Friday, the kids aren't getting a new skateboard, welders aren't welding (steel), iron workers aren't raising rebar, concrete isn't being poured, rocks aren't being crushed, construction boots aren't being sold. You get the picture.

In reply to by ebworthen

GUS100CORRINA Sonny Brakes Sat, 07/08/2017 - 19:29 Permalink

BofA Stunned By Drop In Gasoline Demand: "Where Is Driving Season?"My response: One more 'CANARY IN THE COAL MINE' indicator that screams RECESSION!!! Government figures are nothing but FAKE NEWS based on FAKE DATA performed with FAKE ANALYSIS. We call this the "OBAMA ECONOMICS" program. Just ask Illinois how it is working out.I believe this is getting very real right before our very eyes. Below is latest economic information from a REAL PERSON using REAL ANALYSIS TOOLS and GOOD DATA.===== WWW.SHADOWSTATS.COM =====No. 898: June Labor Conditions, Money Supply M3July 7th, 2017• June Payroll Gain Was on Top of Upside Revisions• Nonetheless, Unadjusted Annual Payroll Growth Held at Low Levels Common to Periods Preceding Economic Recession• Headline Unemployment Remained Well Short of Common Experience• June 2017 Unemployment: U.3 Rose to 4.4% from 4.3%, U.6 Rose to 8.6% from 8.4% and the ShadowStats-Alternate Rose to 22.1% from 22.0%• Watch Out for Reporting Surprises in Week Ahead• June Money Supply M3 Annual Growth Declined to 3.1% from 3.5% in May.=====No. 897: Trade Deficit, Construction Spending, Freight Index, Private Jobs SurveyingJuly 6th, 2017• Second-Quarter 2017 Real Merchandise Trade Deficit Remained on Track for Worst Showing Since Second-Quarter 2007• June Real-World Employment Conditions Continued in Annual Decline, Albeit at a Narrowed Pace Still Not Seen Since the Depths of the 2009 Collapse• In Ongoing, Low-Level Stagnation, May Freight Index Gained Year-to-Year, Holding Shy of Recovering Its Pre-Recession Peak by 12.1% (-12.1%)• Construction Spending Benchmark Revisions Confirmed Likely Downside-Benchmark Revisions Pending for the GDP• Recent Patterns of Real Annual Growth in Construction Spending Revised from Uptrending to Sharply Downtrending, Consistent with a Recession• Real Construction Spending Remained 20.7% (-20.7%) Shy of Recovering Its Pre-Recession Peak, Still Holding in Low-Level Stagnation 

In reply to by Sonny Brakes

auricle Umh Sat, 07/08/2017 - 21:51 Permalink

Who really wants to go on a road trip anymore. Here in the northwest you need an northwest forest pass to go in to the national forest, a special discover pass to paruse public lands in Washington, state park passes if you want to visit a state park, national park passes if you want to visit an national park. Camping fees are outragous plus extra car fees and a forest service ranger will be around promptly at 10pm to tell you to shut up. Want to go fishing, you'll need a license for that as well. Everywhere you go everything you do someone is there to collect money from you. And if you don't, they'll be there to give you an outragously high fine. Tax people enough and they'll just stay home. 

In reply to by Umh

carlnpa auricle Sat, 07/08/2017 - 22:05 Permalink

When the cost of gasoline and diesel near parity, which they have, we are in a recesssion.  EVERY TIMEWe are at that point now, I feel bad about it, We never recovered from the last round. we won't financially survive this one.10 years was just too much, and age is taking its toll.0% on savings ate the princpal and I bonds.SoFuck the fed.Fuck congress.Fuck the senate.Fuck the local tax vampires.Fuck the state that made my kids move away to find jobs. 

In reply to by auricle

zebra77a Stuck on Zero Sun, 07/09/2017 - 11:24 Permalink

Amazon.One truck now = 1000 shoppers.Secondly this is a combination STRUCTURAL / CULTURAL CHANGE.  It means that people are learning to live without the consumption we used to enjoy and the lifestyles we used to live..  That's what's happens when the middle class is snuffed out by debt.The only way to solve it is to reset the national debt, the mortgages, put wages back to parity there were in 1975, with the corresponding gas prices then wait three years while people learn how to consume agaon.

In reply to by Stuck on Zero

CheapBastard praps Sun, 07/09/2017 - 08:18 Permalink

I'm spending all my "discretionary income" on the Obamacare scam, unaffordable insurance. The Bank is either clueless, delusional, or just lying that it does not understand why gas demand dropped. I went to a store and a mall yesterday just for laughs and my prediciton is the retail apocalypse will be much bloodier then these anal-ists predict. BTW, Sears announced that it will close an ADDITIONAL 43 stores on top of the hundreds it already announced.8 years of Obama and his fanatic socialist and Marxists (Piglosi, Reid, Jarrett, Lowrenta, etc) has consequences.

In reply to by praps

froze25 (not verified) CheapBastard Sun, 07/09/2017 - 08:34 Permalink

Our malls are only populated by Dindues these days who just "chill" or are "holding it down". They don't spend a dime and basically make the shopping experience suck so no bodY goes anymore. Why bother when you can order off Amazon and not have to deal with that horse crap?

In reply to by CheapBastard

Ex-Oligarch Fish Gone Bad Sun, 07/09/2017 - 10:06 Permalink

"It's the economy, stupid."Or is it?184 comments so far in this thread airing legitimate complaints about the economy, yet nobody seems to have looked closely at the BofA analysis.Help me out here, guys.Look at Chart 3, tracking consumption, which is the linchpin of the article.Chart 3 goes back to 2012.  The 2017 data line is actually higher than every year except 2016, which it tracks pretty closely. What's more, the article is premised on the idea that demand peaks around July 4, but the chart contradicts that, and shows demand peaking at various times over the summer.  In some years, it peaks in August.  So what am I missing?  

In reply to by Fish Gone Bad

chubbar GUS100CORRINA Sun, 07/09/2017 - 08:05 Permalink

The real question is why BofA is so fucking clueless about what is happening with the economy? Practically every ZH contributor can rattle off a list of at least 6 MAJOR indicators of a stagnating and recessionary economy but Bof A is STUNNED that gas usage is way down? It just goes to show everyone that these so called analysts are completely inept.

In reply to by GUS100CORRINA

swmnguy Sonny Brakes Sun, 07/09/2017 - 08:59 Permalink

Quite right, "Sonny Brakes."  You're describing the real economy, which is moribund.Our economy has become completely financialized.  Real economic activity is far less profitable than abstract paper-pushing.  So our system, as it has developed, discourages real economic activity and displaces it with abstract paper-pushing.Then when we need to do something real, like building roads and bridges, fixing our schools, providing and receiving health care, whatever; since it's not as profitable as paper-pushing, we're told we simply don't have the money for that and it's all our fault for wanting it in the first place. 

In reply to by Sonny Brakes

junction ebworthen Sat, 07/08/2017 - 20:47 Permalink

For one answer to this conundrum, look to Chief Justice John Marshall's dictum, "the power to tax involves the power to destroy" (McCulloch v. Maryland).  The American middle class has been systematically destroyed by direct taxes - high income taxes, property taxes and sales taxes - and indirectly by government social taxes - parking and traffic tickets, zero tolerance laws and pervasive corruption that allowed narcotics imported by the Air Force cargo planeload to poison citizens.  That people no longer drive as much even with low gas prices is part of a bigger picture, as the mortality rates of Americans at all ages skyrocket while our degenerate rulers are busy harvesting the pineal glands of murdered children.  Pineal glands that contain hormones that can reverse the effects of vascular dementia, as Hillary Clinton knows from first hand experience.  A country now run by vampires is business suits.

In reply to by ebworthen