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Assessing gasoline demand

Sam Fletcher
OGJ Senior Writer

Prospects for increased US gasoline demand have been written off by much of the industry and many analysts to the point that it has become “a sort of conventional wisdom” that the market “will decline inexorably from this point,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

By the end of 2009, some chief executives of major oil companies were “so unequivocal about gasoline’s dire future” that one might think it had been “a truly awful year” for the US gasoline market. “However, reality and rhetoric are not always the same,” Horsnell said. “On the latest data available, US gasoline demand did indeed fall in 2009…by just 0.03%.” Moreover, he said, “The final data is likely to show that it did not fall at all, as the final revisions to US gasoline demand are usually upwards.”

So 2009 was “no great disaster” for gasoline when compared with the 8% fall in distillate demand. And while demand did weaken in 2008, Horsnell said, “No yawning chasm was created, as it only fell by just over 3%. To be precise, the cumulative fall in gasoline demand across 2008 and 2009 from the 2007 level was just 3.2%.”

One might conclude 2010 is to be the worst year of all “for the pessimism to remain so pervasive.” However, 2010 has started off well. “The highest monthly reading in April for US gasoline demand was in 2007 at 9.215 million b/d. The latest weekly reading is 9.325 million b/d, higher than three of the weeks in April 2007 and also higher than the April 2007 average,” said Horsnell.

“With lower prices US gasoline demand could exceed the 2007 level in 2010,” Horsnell said, “but even with current prices it will not take many years of gross domestic product growth and demographic change to take US gasoline demand back above its supposed peak of 2007.” He said, “Gasoline output is currently high, with a 335,000 b/d year-over-year rise, but this is being compensated for by low levels of imports, allowing inventories to fall on a normal seasonal pattern. There may not be any explosive upside in gasoline, but its underlying dynamics remain sound.”

By contrast, Horsnell said, “Distillate dynamics remain a bit sluggish. Demand dynamics are improving a bit, but to date 2010 has been disappointing for diesel demand, particularly given the scale of goods restocking that took place in the first quarter, and what we now estimate to have been 4.5% growth in US GDP during the quarter.”

The American Trucking Association said seasonally adjusted total truckload miles fell by 0.2% in February from January and are higher “by a slightly disappointing 3.8% year-over-year, which is nowhere near the scale of improvement that might have been expected given the current position in the inventory cycle,” Horsnell said. “Distillate inventories have started their usual seasonal rise a little early, and the distillate inventory overhang remains larger than that in gasoline. Diesel should be the oil product that shows the greatest gearing in relation to the current stage of the economic cycle, but it has been underperforming, and instead it has been gasoline that has produced the steady flow of solid data,” he said.

Iranian crude
Meanwhile, crude inventories are not falling as fast as they were in February, and floating crude inventories are on the rise again. “But then again this is now the second quarter when the usual seasonal pattern is one of builds. Relative to the usual seasonal pattern the overall pace of tightening seems to be progressing much as before,” Horsnell said.

The additional floating storage “may be something of a red herring,” he said. “Before the floating crude, storage was held by traders who had locked in the economics of the contango play. The recent crude storage is exclusively Iranian, and is most certainly not a contango play. A build-up of Iranian cargoes has been known several times before and usually tells us more about the sometimes eccentric logistics and marketing of Iranian oil than it does about global balances. Add in some of the political elements…and it becomes even less surprising. Unless due to some very strange movement in the margin of the global market all imbalances were made manifest solely by changes in Iranian oil alone, the build-up in Iranian cargoes tells us more about geopolitics and poor marketing than it does about balances.”

(Online Apr. 19, 2010; author’s e-mail: samf@ogjonline.com)


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