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.