Oil Weekly: Low Gasoline Inventories Threaten Summer Spike

Summary

• US gasoline inventories remain dangerously low at 218mn barrels. That is 6% lower than the five-year average of 233mn and the lowest during this time of year since 2014.
• Low gasoline inventories as US driving season starts should push gasoline cracks higher. We are bullish RBOB cracks to $40.
• Further threats from Saudi’s energy minister are unlikely to impact the oil market in the short run.

Gasoline Stocks Flashing Red

Memorial Day weekend marks the start of US driving season, which is an important factor of global oil demand. US gasoline demand over the summer averaged 9.3mn b/d over the last five years – or over 9% of global 2022 oil demand. The pick-up in demand over this period is estimated to be 0.5mn b/d versus the previous three months, helping explain the seasonal up-trend in oil prices we tend to see looking back (Chart 1).

This year, the average gasoline price at $3.54 a gallon is down 24% from last year’s price of $4.62 (Chart 2).

The lower gasoline price boosted demand in January, with total miles travelled in the US rising by more than 5% Y/Y. However, over Q1, this figure decelerated sharply to just 0.6% Y/Y as trucking and other freight-related activities slumped (Chart 3).

According to GasBuddy’s 2023 Summer Travel Survey, , 64% of Americans are planning a summer road trip this year – up from 58% last year. However, 60% of that group has yet to confirm their plans by booking accommodation, activities or other travel plans. The survey also showed that 45% of respondents said high gas prices were affecting their road trip plans this year – in 2022, that number was 70%.

Similarly, AAA projects 42.3mn Americans will travel 50 miles or more from home this Memorial Day weekend – a 7% increase over 2022.

However, looking ahead, disappointing demand materialising from this year’s driving season would likely cut the right tail off this year’s oil price.

One way gasoline demand could disappoint is if more people choose to travel via public transport rather than their own vehicle. AAA estimates a 20% increase in people travelling via bus or train.

However, the main risk to summer season stems from dangerously low gasoline inventories, which could continue to force refining margins higher and negatively impact demand.

Currently, gasoline inventories stand at 218mn barrels. That is 6% lower than the five-year average of 233mn and the lowest during this time of year since 2014. On a seasonal basis, gasoline inventories tend to peak in February. Downtrends then tend to emerge, lasting until well after driving season is over (end of August) and into October. Should the trend in inventories look similar this year, gasoline inventories could bottom at 200mn barrels, which would be the lowest since 2012. Dangerously low gasoline inventories would require gasoline cracks to remain higher for longer to incentivise refiners to shift production from other refined fuels (Chart 4).

There would likely be a knock-on impact on inflation too, as even if oil prices remain steady, gasoline prices would continue to creep higher, which would feed into CPI.

What’s caused gasoline stocks to remain so low this year?

The reasons are twofold. Firstly, refiners underwent a longer maintenance period than usual, boosting oil stocks, but gasoline stocks rose far less. Second, US net imports have been far lower than historical averages, driven by higher exports. Therefore, we have seen more gasoline leave the US for elsewhere, meaning higher gasoline stocks abroad, but less at home. Exports of gasoline have averaged more than 0.8mn b/d versus a five-year average of 0.7mn b/d.

We Are Bullish on Gasoline Cracks

Higher crack spreads are another way of saying higher refining margins, as it shows the spread between the petroleum product and oil as feedstock is widening.

The benchmark 3-2-1 crack spread shows the profits made on using three barrels of oil to produce two barrels of gasoline and one barrel of diesel. So far this year, the 3-2-1 crack spread widened by $2 even as WTI is down almost $10 a barrel (Chart 5).

We can split this into diesel cracks, which are down 80% since end-2022 due to weak demand and normalising refining activity. This has come as distillate inventories are also below their five-year average (Chart 6).

In contrast, the RBOB gasoline to WTI crack has risen by 95% to $33 a barrel, helping keep US gasoline prices elevated. Despite being lower than the c. $60 a barrel spread of last year, the current gasoline crack is within the 95% percentile when looking back to 2006.

Should demand surprise to the upside, gasoline cracks could head back towards $50 a barrel – near the $60 high of last year amid Russia’s war on Ukraine. We see the more probable path being toward $40 a barrel, with downside risks being driven by a fall-off in gasoline exports allowing inventories to fall by less than expected over the summer.

Saudi Threatens Speculators

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said on Tuesday he would inflict more pain on short sellers and told them to watch out, just days before a planned OPEC+ meeting to decide on future oil policy:

‘Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don’t have to show my cards I’m not a poker player… but I would just tell them watch out.’

Our take is simple: this is equivalent to the CEO of a public company coming out to rave against short sellers.

While we disagree with the bearishness in the positioning data, these comments speak to OPEC’s larger concerns around demand disappointing to the downside and negatively impacting Saudi’s energy-related revenues. We think as fundamentals continue to deliver over the next few months, speculators will likely get washed out, helping the oil price rise.

Further action from OPEC is unlikely in the short run as surprise voluntary cuts can only work once – while demand holds up. Further cuts, or further promises of cuts would likely only result in a short-term spike and likely take market share away from Middle Eastern oil as other blends become more attractive.

In the short run, OPEC are unlikely to be a driver of the oil price, with demand (namely China and the US via driving season) now taking centre stage.

There is a longer-term consequence. Despite US shale being the largest driver of oil supply growth this year, increased focus on capital discipline means there is no longer a swing producer able to step in should prices rise going forward. This incrementally increases the market power OPEC+ has, despite contributing a smaller percentage of global supply than in the past.

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)