The Seasonality of Gasoline
After a slow start due to a fierce winter, gasoline demand in the United States picked up late in the first quarter of this year, accelerating into the second quarter until June, when the year-over-year comparison with 2013 narrowed gains. The slowing pace of demand growth in the second quarter -- turning negative in June -- coincided with an increase in gasoline prices.
Higher gasoline prices continue to turn back demand, an ongoing correlation.
The onset of higher retail prices, averaging above $3 per gallon nationally since 2011, takes a sizeable bite from consumers' wallets, with gasoline expenditures per average U.S. household income before taxes standing at 4 percent in 2012, according to the Energy Information Administration (EIA).
The new normal in gasoline prices has helped to usher in elasticity in demand, elevating consumer sensitivity.
An early season hurricane in the Atlantic Basin, Hurricane Arthur, was also ill-timed, slamming into the Outer Banks of North Carolina on July 4, a Friday no less, as the category two storm quickly moved north along the heavily populated eastern seaboard. Holiday travel by automobile was forecasted to be the strongest since 2007 despite the highest retail prices for the Independence Day weekend since 2008, averaging $3.70 a gallon nationally, until Arthur dampened demand.
Job growth, an improving economy and an upbeat consumer should again boost demand during the balance of 2014, although this is contingent on the U.S. economy continuing to grow.
U.S. gasoline demand reached a high in 2007 of 9.286 million barrels per day (bpd), declining sharply during the Great Recession, before again expanding. U.S. gasoline consumption increased 90,000 bpd or 1.1 percent to 8.774 million bpd in 2013, the largest year-over-year growth rate since 2006. Gasoline demand is expected to grow another 30,000 bpd this year, according to the EIA, but then slip by 10,000 bpd in 2015.
The slowing-to-negative consumption growth rate, with gasoline demand holding below 9 million bpd every year since 2007 after holding above 9 million bpd from 2004 through 2007, is directly linked to better fuel efficiency for new vehicles.
The fuel economy for new vehicles sold in the U.S. exceeded 25 miles per gallon (mpg) for the fifth consecutive month in June, according to researchers Michael Sivak and Brandon Schoettle at the University of Michigan Transportation Research Institute. Sivak and Schoettle said vehicle fuel economy is up 5.4 mpg since October 2007, the month they began their research.
Retail gasoline prices are also trending lower, with EIA’s U.S. average down 12 cents in 2013 at $3.51 per gallon, and projected at $3.45 per gallon in 2015. This year’s average is forecasted at $3.54.
This year's forecast was revised higher in July following turmoil in Iraq during June, which threatened to cut off the country’s exports. Before radical Sunni militants battled their way through the northwest of the country, climbing oil production in Iraq had helped to soothe global oil prices, offsetting supply disruptions in Libya and Nigeria and lower output from Iran amid sanctions.
Gasoline futures, which trade on the New York Mercantile Exchange as the Reformulated Blendstock for Oxygenate Blending (NYMEX RBOB) contract, rallied to an 11-month high of $3.1520 per gallon on June 23 based on higher global oil prices and expectations for strong demand during the July Fourth weekend.
As the Iraqi military secured the country’s oil production and export facility in the south, the Kurds did the same in the north and Sunni militants were contained north of Baghdad, crude oil and gasoline prices dropped. Nearest delivered RBOB futures fell in seven consecutive sessions from late June to early July, trading as low as $2.9007 a gallon in mid-July — a 25-cent or 8-percent drop in 12 trading days.
Supply disruptions whether caused by war, nature or industrial accident will affect oil prices, although price volatility in the U.S. has been contained compared with recent history by surging growth in US oil production.
U.S. crude production has reached a 28-year high and output continues to climb, swamping the country with supply and prompting producers to seek ending the restrictions on exporting crude that were imposed in 1975 following the OPEC oil embargoes.
The U.S. has the capacity to produce more gasoline than it needs following expansion in the boon years, lower demand and ethanol, which now accounts for nearly 10 percent of the gasoline market. Gasoline supply has tracked closely with the five-year average in 2014, highlighting the discipline by refiners, moving below 2013 inventory levels late in the first quarter and staying there.
Gasoline supply builds in the winter when demand is lowest and ahead of seasonal maintenance during the spring, when supply is drawn down as refining units shut. Refiners again boost processing rates during the summer months when gasoline demand is highest.
Seasonal features factor a great deal into gasoline prices, which advance and decline on expectations as much as on actual changes in supply and demand.
Gasoline prices typically hit their annual lows in January or February when demand craters amid the cold winter months. However, gasoline prices don’t always set their annual highs in the summer even though that’s when demand peaks each year, a consequence of commodity speculation.
Commodities are valued on a cost recovery basis, meaning wholesale prices are set by what it would cost to replace a gallon of gasoline sold as opposed to what it costs to bring that gallon to market.
In wholesale spot trading, NYMEX RBOB futures are used as a benchmark in setting prices, with the numerous gasoline grades across the country’s main trading regions trading at a premium or discount to the very liquid futures contract. This practice allows wholesale gasoline values to incorporate the many influences on price, including global crude costs.
Gasoline futures, which are monthly contracts trading the month ahead to nearly three years out, are used by commercial interests to hedge a physical position in the market, with a hedge being a form of insurance. What makes futures work, however, is the participation of speculators whom frequently take the opposing position of a commercial participant.
Seasonal factors are well known in the market, with the market constantly gauging supply and demand, and how they match.
Since the summer months represent peak driving demand coupled with seasonal refinery maintenance in the spring, gasoline futures tend to advance from winter lows into spring in what is called a pre-season rally. From 2010 to 2013, NYMEX RBOB futures peaked in May, April, March and March, respectively. Ahead of the surprise warfare in Iraq in June that rallied RBOB futures, a high of $3.1128 gallon was reached this April.
Nearest delivered RBOB futures should trade at the lower end of the $2.85- to $3-per-gallon range for the balance of the summer and sell off into September to a $2.75 to $2.90 range with the seasonal decline in driving demand. RBOB futures should firm up in October, although the downside risk runs to $2.50 gallon through the end of the year.
Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News.