What's going on with gasoline demand given the general conclusion from the latest economic data that the U.S. economy is recovering? According to the MasterCard Advisors' Spending Pulse survey during the week ending February 3rd, gasoline demand in the U.S. fell another 2.8% to 8.269 million barrels per day, which marks a 5.3% decline from a year ago. If you focus on the four-week moving average of demand, it fell year-over-year for the 46th consecutive time. For that period, demand was 4.9% lower than a year ago.
The easiest explanation for lower gasoline demand is that people are driving less because of the recession and high pump prices, and when they have to drive they are using more fuel-efficient vehicles. The data for vehicle miles driven support those points. The big question, however, is whether the weak demand is due primarily to the weak economy and continued high unemployment, or whether there might be other factors at work. We believe this topic merits greater analysis and we will be revisiting it, but in the interim one has to conclude that there may be structural shifts underway in the vehicle fuels market. While economic conditions have to be one cause, changes in consumer spending and entertainment habits are other forces that could be negatively impacting miles driven. A comment in a letter to the editor of The Economist on British retailing highlighted these cultural changes. The writer wrote, “And if I need to buy books I'll click on Amazon, where parking availability is not an issue.” Cultural habit changes are obvious factors, but preliminary data also shows the possible end to the growth in American licensed drivers. Could this be a stealth factor? There is plenty of data to study, but we suspect it will substantiate a permanent decline in the U.S. gasoline market. If correct, there are negative implications for fuel tax receipts, highway spending and new car sales – all of which will limit economic growth.
Eoin Treacy's view It may take time to become apparent but high energy prices cause consumption habits to change. When energy prices are low, the cost of commuting, road trips, air fare, school runs and shopping expeditions tend to be inconsequential factors in planning. However, as prices rise, the impact on personal finances becomes ever more apparent; necessitating behavioural adaption. The correlation between the penchant for “green” energy and high prices over the last decade mirrors a similar drive during the oil crises of the 1970s.
At the same time, high prices act as an incentive to produce more where possible. Since OPEC is a considerable inhibitor to supply increases, oil companies have to either increase production from existing wells through technological advances or discover new resources outside the control of national oil companies. US unconventional oil and gas reserves are increasingly being exploited through innovative technological enhancements. Over the medium to long term this should put downward pressure on US energy prices.
As these two trends converge, the prospect of US energy independence is becoming a realistic possibility over the next decade. However in the short-term, risks are to the upside for energy contracts as they attract speculative interest, not least because increases in money supply spur investors to seek assets likely to hold their value.
The US Daily National Average Gasoline Price tested the $4 area in April and trended steadily lower until December. It has since rallied to break the progression of lower rally highs, and a sustained move below $3.40 would be required to question scope for some additional upside.
West Texas Intermediate has been ranging in the region of $100 since mid-November. It firmed within the range this week and a clear downward dynamic will be required to question current scope for additional upside.
Heating Oil has been ranging around $3 since April and has exhibited a rounding or saucering characteristic over the last few months. It is currently testing the upper side of the congestion area and a sustained move below $3 will be required to check current scope for additional upside.