Commodities | COVID | US
We analyse latest US mobility trends and reiterate our 16 June bullish oil call. Our rationale for higher oil prices on the back of the economy reopening, coupled with a strong preference for car journeys during the peak US driving season has been reinforced by recent mobility data. A continued reduction in oil supply given the latest production cuts also supports our bullish view.
Energy prices have started to drop back recently as a spike in COVID cases has delayed reopenings in several US states. But this is within normal ranges and we do not see this significantly effecting our bullish oil and gasoline views. Overall we retain our Dec 2020 $48 WTI Call option recommendation.
Background:
Global economy begins to re-open triggering a significant rebound in energy demand from low levels. Despite the recent jump in cases in certain US states, we don’t see that having a significant impact on the economy re-opening.
China has led the rebound in demand, but now others in Asia, like Japan, are following. Europe and US are also now entering their re-opening phases.
Concern around the COVID infection risk around using subway systems, and general public transport will likely see more use of cars as people return to work.
As lockdown measures are loosened, we expect an increase in short term holiday travel specifically led by the US. However, rather than using domestic flights, people will likely use cars instead. This could see an upside surprise in demand coming during the US peak driving season. We could see potential similar experiences during European holiday season.
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- We analyse latest US mobility trends and reiterate our 16 June bullish oil call. Our rationale for higher oil prices on the back of the economy reopening, coupled with a strong preference for car journeys during the peak US driving season has been reinforced by recent mobility data. A continued reduction in oil supply given the latest production cuts also supports our bullish view.
- Energy prices have started to drop back recently as a spike in COVID cases has delayed reopenings in several US states. But this is within normal ranges and we do not see this significantly effecting our bullish oil and gasoline views. Overall we retain our Dec 2020 $48 WTI Call option recommendation.
- Recent data show a substantial pickup in driving. Versus a January baseline US driving activity is now almost 40% higher and has recovered sharply from the April low (Chart 2). In several key states driving activity is now around 50% higher than baseline (Chart 5). Google search data also confirm a willingness to travel by car (Chart 3).
- Recent macro data also point to a broad pickup in economic activity.
- As Apple and Google base measurements on benchmarks recorded in winter we also look at gasoline supply growth between January and July to get a more accurate gauge of driving activity versus a relevant baseline. Over the past 20 years, average gasoline supply growth is 7.2% between January and July.
- DOE Motor Gasoline Output Implied Demand shows a significant bounce back from earlier lows (Chart 1). This also supports our bullish case for oil and gasoline.
Chart 1: DOE Motor Gasoline Implied Demand data is recovering
- Looking at the current mobility trends, the following insights emerge:
- According to Apple – driving activity returned to the baseline value (13 Jan 2020 = 100) in almost every US city or region, irrespective of what stage they are at in the re-opening process
- According to Google, parks and recreation (consisting of Public Gardens, Castles, National Parks, Forests, Camp Grounds, and Observation Decks) are significantly above baseline values. People are usually using cars to reach most of these places! Which are usually quite long journeys as well. (For Google, baseline value means the median value of each week-day in the 3 Jan – 6 Feb 2020 time interval)
- Across the country, the Transit category remains relatively depressed
- In most of the cities analysed, driving and walking saw similar rebounds. The exceptions are NYC and San Francisco, where only driving data show a meaningful increase.
John Butler has 25 years experience in international finance. He has served as a Managing Director for bulge-bracket investment banks on both sides of the Atlantic in research, strategy, asset allocation and product development roles, including at Deutsche Bank and Lehman Brothers.
Andrew Simon has spent over 25 years in finance on both the buy side and sell side. He co-founded Eschaton Opportunities Fund, a $100 mn+ hedge fund focused on global thematic value investing.
Stefan Posea is a Research Analyst at Macro Hive. His research interests lie in macro-financial interactions and monetary policy analysis. Stefan graduated with an MSc in Economics at Birkbeck, University of London and previously held roles in M&A and the Public Sector.
(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.)