After being locked in a sideways dance for what seemed like an eternity, the two leading crude markers finally broke through the upper end of their recent range. Brent and WTI gained about $1/bbl yesterday and in doing so closed at the highest level in more than four months. The upside breakout came on the heels of a double dose of bullish impetus. First and foremost, European leaders signed off on a COVID rescue package to shore-up virus-ravaged economies. Alongside this injection of fiscal stimulus, sentiment was further buoyed after several COVID-19 vaccine trials showed promising results. All the while, oil prices were also pushed along by a softer dollar.

The tide of optimism spilt over into Wall Street as the S&P500 and Dow Jones inched higher. Rising energy shares helped the former climb further into positive territory for the year. Gains, however, were capped by the worsening coronavirus outbreak in America. In a shift in tone, President Trump conceded that the US pandemic will get worse before it gets better. What is more, he urged mask wearing. His downbeat prognosis left a bitter taste in the mouths of investors. In a sign of the times, gold hit a nine-year high, suggesting that pockets of unease remain despite the overall upbeat tone.  

Back on the oil front, prices are reversing course this morning amid expectations for a sharp jump in US oil inventories. Overnight, the API reported that US crude stocks surged by 7.5 million bbls last week, dashing hopes for a draw of 2.1 million bbls. Meanwhile, gasoline stocks fell by a bigger-than-expected 2 million bbls while distillate fuels stockpiles declined by 1.4 million bbls. US glut fears have become a permanent fixture of the oil market. This will remain the case so long as the US oil demand outlook is being undermined by the country’s failure to contain the COVID pandemic.

 Shifting into reverse

Positive correlations are a dime a dozen. Some are more spurious than others – like the rise in US ice cream consumption and the murder rate. Others are far more robust in their validity. A case in point is the strong link between US employment and gasoline demand. Rising employment increases people’s mobility which in turn boosts fuel demand and vice versa. The fortunes of both these variables are tied to the hip, and, worryingly, the warning lights are starting to flash.

Following record job growth in June, the US labour market recovery is stalling. New jobless claims remained steady at 1.3 million last week, confounding expectations for a drop. This comes amid a resurgence in new COVID-19 cases. The country is seeing a record number of infections. States hardest hit by the spike in infections include California, Texas, Florida and Arizona, which together represent about 30% of the US economy. Reopenings were subsequently paused in some cases lockdown measures were reimposed.

The return of coronavirus restrictions in some of the most populous US states is hampering the labour market recovery. And to little surprise, it is also suppressing fuel demand across the country. US gasoline demand trended higher since bottoming out in early April as economic activity and confidence gradually rebounded. Now, though, the recovery has ground to a halt as infections rise. Consumption was broadly flat in the four weeks to July 10 at around 8.6 mbpd, according to weekly EIA data. Furthermore, US gasoline demand is forecast to have dropped by 5% on the week in the seven days to July 11, according to price-tracking company GasBuddy. This pullback in consumption is a concern, but even more so when considering that it is occurring at the height of the US summer driving season.

Worse still, the flagging recovery in US gasoline demand comes amid a massive inventory overhang. Gasoline inventories declined in the last two weeks but are still 6.8% above the year-ago level and 4.2% above the five-year norm. Meanwhile, gasoline margins have come under pressure as US motorists shy away from the gas pumps. The RBOB/Brent crack spread was trading around $12/bbl at the end of June and is now around $8/bbl. All things considered, the US gasoline complex is taking a turn for the worse. This spells bad news for the global recovery in fuel demand given that US gasoline represents 10% of total world oil demand.

The loss of momentum in US gasoline demand has dented hopes of a return to pre-virus normalcy. Usage is still running about 10% below year-ago levels and it is hard to see consumption rising significantly from current levels in the coming months. After all, infections are rising and pandemic relief programs are nearing their end. Even so, the EIA upgraded its outlook for US gasoline demand this year in its latest monthly report. It now sees US gasoline consumption averaging 8.32 mbpd in 2020, up from a previous estimate of 8.09 mbpd and down 1 mbpd on 2019. This brighter outlook is in stark contrast to recent demand data. Only time will tell whether this optimism proves to be justified. For now, the future trajectory of the oil market will hinge a great deal on the fortunes of US gasoline demand.