Cast your mind to this time last year. The world was as we know it was on the verge of collapsing. Now, global stocks markets are at record highs. It was a case of records galore on Wall Street yesterday as the Dow Jones and S&P 500 scaled new peaks. This came amid a double whammy of positive data that showed the US economy is on an upward path. For starters, retail sales surged 9.8% in March, the biggest monthly jump in 10 months and well ahead of forecasts for a 6.1% gain. Increased hiring, the lifting of Covid restrictions and stimulus cheques encouraged US shoppers to splash the cash. Meanwhile, in another boost, the number of Americans filing new unemployment claims hit its lowest level since the pandemic began. The weekly jobless claims total plunged to 576,000 last week, a decrease of 193,000 from the previous week’s revised level. While this is still double the pre-pandemic level, the significant drop is a big step in the right direction.
Data pointing to surging US economic activity provided bullish fodder for the energy complex. Indeed, oil bulls took heart from the latest titbits of information that reinforced expectations the American economy is recovering strongly from the pandemic. Brent and WTI tacked on around 35 cts/bbl yesterday, adding to Wednesday’s hefty breakout gains. And there is no sign of cooling off at the time of writing. Both crude markers are making additional headway into positive territory on the back of record Chinese GDP data. China’s economy expanded by a blistering 18.3% in the first three months of 2021, underscoring the strength of its recovery from the coronavirus pandemic. Given the improving outlook for the world’s two biggest economies, there is little chance of the market’s feel-good glow being extinguished anytime soon.
Close, but no cigar
Demand optimism is sweeping through the oil market. Much of this is down to the recovery in US gasoline consumption. Demand for the fuel has been leading the comeback, a fact cemented by a recent flurry of important milestones. First and foremost, US gasoline demand exceeded 2020 levels for first time in 2021 in the week to March 20, according to OPIS. Shortly after, the US posted its first increase in vehicle miles travelled since before the pandemic began. Miles travelled on US highways were up 1% from the same week in 2019 through April 11, according to the Department of Transport. And most recently, latest EIA data pegged US implied gasoline demand at 8.94 mbpd in the week to April 9, the strongest level since August. All the evidence points to strong US consumption of the fuel.
And more of the same is expected in the near-term as the summer driving season begins in earnest. US motorists will likely take to the roads in greater numbers as vaccinations become more widely available and the weather turns warmer. This impending release of “pent up” demand means that gasoline will become increasingly expensive. According to the EIA’s annual Summer Fuels Outlook, released last week, average pump prices this summer will be more than 30% higher than last year at $2.78/gal. But many analysts are estimating prices will hit $3/gal for the first time since 2014. Either way, drivers eager to get back on the road more than a year into the pandemic will face the highest summer gasoline prices since 2018.
Nevertheless, despite the backdrop of rising prices, the EIA still expects US gasoline consumption to increase this summer compared with last summer. Gasoline consumption from April to September will rise to 8.84 mbpd from 7.81 mbpd in 2020. That being said, while more gasoline is expected to be consumed this summer than last, it will fall short of the level seen in 2019. Demand in 2021 will peak in August at 9.1 mbpd, more than the 8.5 mbpd witnessed in August 2020 but less than the 9.8 mbpd in August 2019. And the same is also true for current consumption levels. Despite the positive year-over-year posting, gasoline demand is at 8.8 mbpd compared with 9.4 mbpd seen in April 2019. Simply put, demand still trails pre-pandemic levels by a considerable margin and has a long way to go for a full recovery.
The EIA’s updated gasoline forecasts suggest that even as the country gets back to normal, the lingering effects of the pandemic will continue to weigh on gasoline purchases. In the meantime, rising gasoline demand heading into the summer month is sending a strong signal to refiners to maximise gasoline production. In the week to April 9, US refinery utilization rose to 85%, its highest level in a year. As gasoline output increases, the focus will shift to inventory levels. US gasoline supplies are marginally above the five-year average and should start receding soon. But there is a danger that US refiners will continue to increase their runs beyond what is required. This would translate into a looser balance in which gasoline inventories rise, putting further weight on cracks. For all the impressive demand gains made by the US gasoline complex lately, the near-term outlook for inventory and crack levels is still clouded by uncertainty. What is clear is that it will struggle at best and fail at worst to return to pre-Covid normalcy.