As the summer driving season unfolds across the U.S., the gasoline market, usually a bustling hub of activity, is experiencing an unexpected slowdown.
Traditionally, this time of year sees a surge in road trips, vacations, and heightened gasoline demand, which in essence drives prices upwards. However, this summer paints a different picture, one that has caught analysts by surprise and prompted refineries to reassess their strategies.
Recent government data has revealed that by the end of last week, there was a 2% decline in U.S. gasoline demand, plummeting to 9.15 million barrels per day. This decline is particularly noteworthy given that refiners have been operating at their highest levels in nine months, anticipating the usual seasonal uptick. Nonetheless, despite such hopeful expectations, they have actually found themselves grappling with an unforeseen buildup in gasoline inventories, which in essence has pushed futures prices for gasoline to a three-month low.
So, what’s driving this shift?
One significant factor is the preferences in travel. For instance, over the Memorial Day weekend, airports witnessed a flurry of activity, setting new records as nearly 3 million people opted to fly rather than drive. And this shift not only reflects a change in holiday travel habits but also translates to fewer miles being driven and, consequently, reduced gasoline demand.
In addition, the increasing prevalence of fuel-efficient vehicles and electric vehicles (EVs) is playing a pivotal role. With modern cars designed to be more fuel-efficient and the growing adoption of EVs eliminating gasoline consumption altogether, the impact on gasoline demand is becoming increasingly pronounced.
Furthermore, economic factors are also contributing to the subdued demand as with inflation taking a toll on consumers’ wallets, many are adopting a more cautious approach, cutting back on discretionary spending, including travel.
Let’s highlight that economic instability and uncertainty often prompt individuals to opt for shorter, more budget-friendly trips or stick closer to home.
Thus, as a result of the combination of these factors, gasoline inventories are rising due to weaker-than-expected demand, resulting in lower futures prices, which stands in stark contrast to the typical summer trend.
Moreover, the decline in gasoline demand has also exerted pressure on refining margins, slipping to a three-month low. These margins, which are crucial indicators of refinery profitability, signal that refineries are earning less on each barrel of gasoline produced. And in response, refineries may opt to reduce their run rates, curtailing production to better align with the subdued demand.
Analysts have cautioned that softer refining margins could have broader repercussions, potentially dragging down the entire oil complex, including crude oil prices.
Besides, it is worth remarking that since the U.S. gasoline market accounts for approximately 10% of global oil demand, it holds broader implications for the global oil market. Therefore, as the coalition of oil-producing countries led by Saudi Arabia and Russia, OPEC+, convenes to discuss policy decisions, the recent data from the U.S. is likely to feature prominently in their deliberations.
Also, adding another layer of complexity to the dynamics of the gasoline market, it is the recent occurrence of contango in gasoline futures. This is a market structure, where the price for immediate delivery is lower than the price for future delivery, typically indicates an oversupply in the current market, with expectations of higher prices down the road.
Seeing contango in May is rare, with the last instance recorded in 2021, and if it is happening now, this phenomenon underscores the weakness in the market, prompting traders to consider strategies such as “store now, sell later”. In simple words, this means that the current situation might be an opportunity to invest as prices are low, and those who go ahead with such strategy will possibly get higher returns in the future as they will be selling at a higher price.
In regards of refiners’ response to the reduced margins and weakening demand, they are compelled to make strategic adjustments to maintain profitability and avoid further inventory accumulation. Options may include scaling back run rates to align production with lower demand, shifting focus to other refined products experiencing stronger demand, and enhancing operational efficiency to mitigate costs.
Finally, it is important to highlight that the implications of the weakening gasoline market extend beyond the realm of energy, as while lower gasoline prices may provide relief to consumers by reducing transportation costs, the flip side could entail job losses and reduced economic activity in regions heavily reliant on the refining industry. Fluctuations in gasoline prices can also influence inflation, as lower fuel prices can contribute to lower overall inflation, but any subsequent rebound could fuel inflationary pressures.
