Gasoline Demand Increasing

Jim Brown
 
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Economists and analysts look at a lot of indicators to determine the health of the economy. One of those indicators is the demand for gasoline and diesel.

The EIA inventory report today showed a decline in gasoline inventories of -2.8 million barrels. Gasoline demand rose +510,000 bpd or 3.57 million barrels over the prior week to 8.54 mbpd. That is a huge jump and there is always the possibility of timing problems in the submission of inventory reports to the EIA. However, in this case it might be correct. The warmer weather last week probably stimulated many consumers to leave their homes where they have been cooped up like hermits for the last month as a result of the harsh winter weather. If consumers are coming out of their dens like bears after hibernation then their shopping spurts could be ravenous. The pent up demand of being locked in your house for two months could be very strong. This means multiple trips to multiple stores and restaurants.

I checked to see if exports of gasoline had increased to artificially inflate the demand numbers. Exports last week were 576,000 bpd and that was actually lower than the 586,000 bpd the prior week and 590,000 bpd for the same week in 2013. The four week average was 584,000. Clearly exports were not the reason for the increased demand.

However, imports declined sharply from 410,000 bpd the prior week to 276,000 bpd. This compares to the four week average of 414,000 bpd. That decline in imports of -134,000 bpd equates to about one third of the increased demand. Lower imports mean inventory declines.

I know what you are thinking. We exported 576,000 bpd and imported 276,000 bpd. Why export if we are also importing? Gasoline is exported from locations where there is an excess of supply like the Gulf Coast and imported in areas where there is a shortage of refining capacity like the Northeast and Northern California. It is cheaper to import it than ship the excess from the Gulf to other areas.

Typically gasoline inventories rise from November until early March and then decline throughout the summer. This year and last the rise in inventory levels ended earlier than the five year average with the peak in late January. I don't know why inventories have peaked earlier than normal but if demand is increasing we could see them also decline faster than normal. This would push gasoline prices higher ahead of the summer driving season.

Wholesale gasoline prices increased a whopping +7 cents last week to a national average of $3.38. That is still -37 cents lower than the same week in 2013. Diesel prices rose one cent to $3.99 and 17 cents below year ago levels.


Refinery utilization ticked up to 88% and that is abnormally high for this time of year. Refiners may be trying to push one more surge of winter blend production into the system before they begin the maintenance process, which begins in March. Refiners typically use the low demand period of March-April to do maintenance on their refineries and then switch over to the summer fuel blends with a different mix of additives to reduce smog. If refiners go into maintenance mode with demand increasing we could see inventory levels of gasoline drop quickly and prices rise.

Crude inventories were basically flat with only a +100,000 barrel gain. Crude imports fell -384,000 bpd to just barely over 7.04 mbpd. Imports are continuing to decline thanks to the spike in U.S. production. However, the winter weather has put a lid on production increases over the last two months. In the first week of January we produced 8.16 mbpd and that is the highest level in 2015. The weather causes production outages and shipping problems.

Cushing inventories fell to their lowest level since October at 34.8 million barrels. This is due to more oil being shipped to the coast over the new pipeline and the slower pace of inflows as a result of the weather. The ability to ship more oil to the coast has reduced the spread between Brent and WTI to only $7 and a 50% decline from late 2013 levels.

Distillate inventories only increased +300,000 barrels for the third week of minimal changes. Distillate production increased by a minimal 71,000 bpd and imports declined by -14,000 bpd. All of this simply means no material change in inventory levels over the last three weeks. With only 2-3 weeks of cold weather left the only homeowners adding supplies of heating oil will be those with near empty tanks. The rest will try and wait for the prices to go down in the summer before spending the money on a refill.

However, with winter weather almost over the airlines will resume flying full schedules and that will boost jet fuel consumption. The nearly 100,000 cancelled flights since December 1st meant jet fuel supplies were rising due to non use.

Note that the refined products supplied to the market has declined nearly 2.0 mbpd since the high of 20.05 mbpd for the week of January 24th. That is the real health of the refining sector.


Crude oil inventories dropped to the lowest point in more than a year in early January but they are trending back up in the five-year channel.


Distillate inventories are trending at the bottom of the five-year average and could easily drop to a new 52-week low at any time.


Propane inventories dropped sharply by -1.2 million barrels to 26.7 million. That is 24.4 million or -47.7% lower than the same week in 2013. Propane prices declined -13 cents to an average of $3.64 per gallon. That is $1.32 more than the same week in 2013.


Market

The markets continue to struggle at the prior highs as we wait for Yellen's Senate testimony tomorrow. The big cap indexes have developed a nasty pattern of spiking in the morning and then selling off in the afternoons. The S&P has done this for four consecutive days and this pattern is normally associated with distribution selling and a potential market top. Institutions are selling into the rallies but not in enough quantity to crash the market. The selling is orderly and restrained. If the S&P were to move below 1,840 I believe the selling could increase sharply.

However, this could just be positioning ahead of Yellen. Once we get past the Yellen testimony the intraday moves will be a lot more important in determining market direction.

Historically the market tends to decline from February options expiration until the third week of March and then rallies into April as investors bet on the next earnings cycle.

Until the S&P moves over 1,850 on strong volume we are still in danger of a market decline.

Jim Brown

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