U.S. Gasoline Demand Down 5.6%

Jim Brown
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The MasterCard Spending Pulse report showed gasoline demand declined the prior week by -5.6% from year ago levels. There is no specific event to blame on the drop other than a cold spell in the north that brought back snow to many states. I believe that is grasping at straws to blame that for all of the shrinking demand. The key to this puzzle will be the gasoline demand over the next four weeks and into the Memorial Day weekend. If demand does not increase significantly then other factors are at work.

Some analysts blame the lack of jobs and rising jobless claims for the lack of driving. The ADP Employment report on Wednesday said only 119,000 new jobs were created in April. This was far below the 170,000-200,000 levels analysts had expected. This news pushed the U.S. equity markets lower ahead of the Nonfarm Payroll report on Friday.

We did see -164,000 people leave the workforce and give up looking for a job in March according to the Nonfarm report. If a like number quit looking for work in April along with the rising jobless claims it could have an impact on gasoline demand. However, the demand slowdown is more likely due to the better gas mileage on newer cars and the higher price of gasoline forcing people to stay home.

Consumers are currently getting a break on gas prices with the national average down to $3.83 per gallon from $3.92 several weeks ago. The decline in gasoline prices is due to the decline in Brent crude to support at $118 after spending the month of March just under $125. The reversal of the Seaway pipeline will actually force the national average for gasoline prices higher. Landlocked oil producers will be able to ship their crude to the Gulf refineries and that will reduce the spread between WTI and Brent. Currently that spread is about $13. Brent is already trending lower and WTI higher as the date approaches. Obviously there will not be enough oil flowing south initially to have a material impact on narrowing the spread but the mechanics are already being felt in the market. Some analysts believe WTI could rise to $110-$112 to match Brent at roughly $114. Others believe the pressure will be worse on Brent with WTI averaging $106 and Brent around $110. Once the full Seaway upgrade is completed and there is 850,000 bpd flowing south the spread between the two prices should be minimal.

The daily economic reports continue to paint a confusing picture of the global economic health. Europe, Asia, Latin America and the USA are all trending in different directions amid a mismatch of economic data. Oil prices have held over $100 for more than two months and appear to be edging slowly higher as we approach the driving season and the Iran sanctions and EU embargo.

This has been a crazy three months. Oil prices rallied to more than $110 and then held over $100 for two months amid growing inventory levels. However, energy stocks have languished because of falling natural gas prices. Even those without a nat gas component have declined with the sector.

Inventory levels for crude have broken above the five year average range and are showing no inclination for a change in the trend. This is the week that trend change normally occurs but normal usage patterns have weakened due to economic trends.

The EIA inventory report showed a gain of 2.8 million barrels of crude to push inventories to 375.9 million barrels. That exceeded the five year average high for last week as indicated by the blue band in the chart below.

EIA Crude Oil Inventory Chart

While crude inventories are building the levels of gasoline and distillates continue to decline. Gasoline declined another -2.0 million barrels and distillates -1.9 million to a new multiyear low. Distillates are 14.5% below last year's levels. This trend should change next week. Refinery capacity spiked to 86% and the highest this year as refiners begin accelerated production of summer blend fuels. These need to be in the system in quantity ahead of the Memorial Day weekend and the kickoff for summer vacation driving.

EIA Gasoline Inventory Chart

EIA Distillate Inventory Chart

Note the rise in inventory levels at Cushing to 43.0 million barrels. This is an all time high and should be weighing on WTI prices if there were no external events. This time there is a reason. The Seaway pipeline is scheduled to begin north to south operations on May 17th. Enterprise Products Partners, operator of the pipeline said 66% of the pipeline capacity had already been contracted. The initial capacity will be 150,000 bpd with future upgrades to more than double that starting capacity to 400,000 bpd. Another upgrade is expected to be in operation by mid-2014 to raise the capacity to 850,000 bpd.

The initial cost to transport oil from Cushing to the Gulf will be $3.82 per barrel. That is referred to as the "walkup rate." That is what non-contracted shippers will pay. Those committing to long term contracts will pay less.

The anticipation of an outlet for Cushing crude nears the amount of crude in storage at Cushing is rising. When the pipeline begins operation it will take a lot of oil to fill it. It will take nearly 2.5 million barrels of oil to fill it and it will take 12 days for oil to make the trip from Cushing to Freeport Texas.

Just filling the pipeline will reduce the oil in storage at Cushing and then a steady drain of 150,000 bpd will remove another million barrels per week. Of course once the oil begins to flow south the northern producers will begin directing more oil towards Cushing to take advantage of that southerly flow. Currently producers are using rail cars and barges to move excess oil south.

Inventory Snapshot

Iran is already upping the war of words ahead of the May 23rd meeting date. They claimed France helped Israel develop "inhumane nuclear weapons." This is an attempt to deflect the spotlight from Iran to one of the six countries participating in the talks over Iran's nuclear program. In another briefing Iran said it would expect the sanctions against Iran to be lifted as a precursor to the talks. The Iranian media quoted Gholam-ali Haddad Adel as saying, "At the least, our expectation is the lifting of the sanctions" at the May meeting. The U.S. and the other nations reiterated that a lifting of sanctions would only occur after Iran had taken strong and lasting actions to calm western fears over weapons research. Iran is still rejecting attempts by the IAEA to visit certain sites where weapons research is being conducted.

Iran will likely increase its rhetoric as we near the May 23rd meeting in order to sound tough and appear to be in control. I strongly believe Iran will try to postpone any hard action and continue its delaying tactics that have worked so well for the last 10 years. They are masters in the politics of delay. Up until now the world has not had the backbone to stand up to them in such a way that forces them to the bargaining table. This time may be different.

On Tuesday President Obama signed an executive order tightening penalties on foreign entities and individuals who try to evade the sanctions on Iran. The administration took the action in response to attempts by individual and entities to sidestep the restrictions by using non-bank financial institutions and alternative methods to transmit funds and make payments. The noose is slowly tightening.