Musings from the Oil Patch
Comment of the Day

March 20 2012

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' iconoclastic report for PPHB. Here is a section on gasoline:
The rise in gasoline prices and the discovery of this disproportionate impact of sales tax calculations on pump prices has come at a time when gasoline consumption is falling. In fact, the magnitude of the drop in gasoline demand is surprising. Moreover, the reasons for the drop are not totally clear. Do they reflect merely the economic impact of higher prices on consumers, which is limiting their ability to spend on non-essential driving? Or does the fall in gasoline consumption reflect other forces at work in both the economy and our lifestyles?

Because weekly gasoline demand is quite volatile due to factors such as weather and the timing of holidays, we have calculated the four-week average for gasoline demand. The chart in Exhibit 7 shows this demand from the beginning of 1995 to the end of February. We have also plotted in green a parabolic trendline showing the rising demand in the late 1990s and early 2000s and the falling demand in recent years. As can be seen, demand was growing faster than the trendline during the mid-2000s, up to the financial crisis in 2008. The entire 1995-2008 period represented boom times for the U.S. economy and consumer spending. That boom ended with the economic crisis of 2008 and the resulting 2009 recession causing gasoline demand to decline. Gasoline demand recovered in 2010 and early 2011 as signs emerged that the economy was starting to recover. Then gasoline demand seemed to collapse in what appears to be a free-fall that is difficult to tie to the performance of the economy.

There are many factors at work in the automobile market – more fuel-efficient vehicles replacing older less efficient ones; a shifting population mix with different driving records; and altered social patterns eliminating the need to drive – that have cut vehicle miles driven. There is also the distinct possibility that the decline in driving is a more accurate barometer of the health of the economy as it may reflect true employment trends. We have been collecting data to prepare an analysis of these various factors in an attempt to better understand the forces driving gasoline demand in this country. Based on our preliminary results, we believe many of the factors have combined to translate into a permanently lower demand for gasoline in the future.

Eoin Treacy's view If we look at depressed natural gas prices and the secular uptrend in global supply, high oil and distillate prices, the slow US economic recovery, the squeezing of the middle classes, the government's need for more revenue, more efficient vehicles and changing social patterns it appears safe to conclude that the energy complex is going through an evolution. Declining gasoline consumption is a symptom of this change. However, the supply side of the equation is keeping pace. Refiners will do what is required to ensure their margins.

The gasoline price has returned to test the $350 area following an impressive rally since late December. It is overbought in the short-term as it approaches an area of previous resistance and is increasingly susceptible to a reversion towards the mean; represented by the 200-day MA.

The refining sector has generally performed in line with the gasoline price over the last three months. Tesoro Corp appears to be in the process of completing a first step above its base. Sunuco is also hitting new recovery highs. CVR Energy has paused in the region of the 2011 and 2008 highs near $30. A sustained move above that level would reassert medium-term demand dominance.

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