It was a day of record highs on Wall Street amid fresh evidence that the world’s biggest economy is shaking off its Covid crisis. The Nasdaq and the S&P 500 indexes closed at fresh peaks on Thursday, with the Dow also jumping almost 1%, after a renewed drop in US jobless claims. The number of Americans filing for jobless benefits fell to 411,000 last week, from 418,000 the previous week. What’s more, durable goods orders rose by 2.3% in May following a 0.8% decline recorded in April. All the while, adding to the feel-good factor, President Joe Biden embraced a $1.2 trillion bipartisan Senate infrastructure deal.
The bullish enthusiasm on stock markets spilled over into the oil market. Brent and WTI edged up to within touching distance of recent multi-year highs. Looking ahead, the prospect for additional price strength in the near-term was given a boost after Citibank raised its oil price forecasts. The bank now expects Brent to average $77/bbl in 3Q21 and $78/bbl in 4Q21.
Whether calls for higher oil prices turns out to be prescient will depend to a large extent on next week’s OPEC+ meeting. The producer group will decide on production policy for August and potentially beyond. Needless to say, the outcome of Thursday’s meeting will set the tone for oil prices over the summer months. As things stand, market watchers are overwhelmingly placing their betting chips on a further unwinding of supply cuts, and rightly so. The producer group has ample space to boost supply without derailing the drawdown in oil stocks given the rosier demand outlook. That being said, there is a risk it could overshoot as cash-strapped members clamour for oil dollars. In the meantime, India’s oil minister urged the producer group to phase out crude output cuts to temper rising inflationary pressures. Similar calls were made earlier this year, but they ultimately fell on deaf ears. This time around, OPEC+ will surely oblige, but to what extent is anyone’s guess.
Fill her up
These words are currently echoing in gas stations across the US. A combination of increasing travel and economic activity has contributed to greater demand for gasoline. The latest four-week average demand for gasoline was 94% of its 2019 level for the same time of year. This marks a turnaround from what was an inauspicious start to this year’s US summer driving season. Gasoline demand averaged 8.48 mbpd in the week to June 4, the lowest since February, with prices at their highest since 2014. As a result of weak consumption, US gasoline stocks rose by 7 million bbls over the week in what was the largest increase for more than a year.
Mercifully, this weakness turned out to be a blip rather than proof of anything more sinister. Implied US gasoline demand has since recovered back above 9 mbpd and is testing pandemic highs. Last week, demand for the fuel stood at 9.44 mbpd, a mere 26,000 bpd below the equivalent period in 2019, EIA data showed. Simply put, US summer gasoline demand is nearly back to normal.
Will this positive momentum be maintained? Expectations are high for a return to peak summer fuel consumption in the coming months as vaccination rollouts, rising employment and re-openings create a path to release pent-up travel demand. Set against this forecast for increasing US gasoline consumption, prices at the pumps will likely remain high. Gas prices are expected to remain above $3 per gallon for most of the summer and even through Labor Day, according to GasBuddy. This is around $1 more than last year’s national price. Nevertheless, despite the more painful price implications, it is not expected to deter increased summer travel.
Consequently, US refineries are well positioned to increase runs in the coming months. Refinery utilisation rates are currently just shy of the 2019 levels. Total refinery net crude inputs recovered, topping 16 mbpd last week and are expected to scramble past 17 mbpd in the coming weeks. That being said, increasing refinery crude throughputs runs the risk of contributing to rising refined product stocks. This, however, is unlikely to be the case for gasoline. A strong domestic driving season should put downward pressure on fuel stockpiles. The same is also true for rising US gasoline exports. Shipments of US gasoline are set for a bonanza as Brazil and Mexico, which together comprise about seven out of 10 barrels of US gasoline exports, begin to emerge from the pandemic. All in all, this should ensure US gasoline stocks remain near five-year lows for the rest of 2021. This, in turn, should keep gasoline crack spreads higher than the five-year average.
Echoing the improving fortunes of the US gasoline complex is the EIA. In its latest STEO, the agency raised its forecast for US gasoline demand for a second month in a row. The EIA now predicts drivers will consume 8.74 mbpd this year, 40,000 bpd more than its previous forecast. So, all’s well that ends well. Not quite. Despite the improving outlook, a return to pre-pandemic levels of US gasoline demand on an annual basis is not currently on the cards. The good times may have returned for the US gasoline complex, but the great times are long gone.