While energy traders remain focused on weekly changes in crude supply and demand, manifesting in shifts in inventory of which today’s API data, which showed the second biggest inventory build in history, was a breathtaking example of how OPEC’s “production cut” is clearly not working, a much more troubling datapoint was revealed by the Energy Information Administration last week when it reported implied gasoline demand.
To be sure, surging gasoline supply and inventories are hardly surprising or new: they remain a byproduct of the unprecedented global crude inventories leftover from two years of failed OPEC policy which resulted in a historic glut. Last January, overall crude runs were up 500,000 bpd as refiners shifted away from diesel and other products to gasoline to chase more attractive margins amid a mild winter and sluggish diesel demand. The move led to an overbuild of gasoline stocks that lingered into the summer, punishing margins when they should have been at their strongest. This January, crude runs are at historic levels, up by roughly 300,000 bpd over last year.
So yes, both gasoline stocks and supply remains at extremely high levels, but what set off alarm bells is not supply, but demand: the EIA last week reported that the 4-week average of gasoline supplied – or implied gasoline demand – in the United States was 8.2 million barrels per day, the lowest since February 2012. And, as Reuters adds, U.S. refiners are now facing the prospects of weakening gasoline demand for the first time in five years.
Unlike excess supply, which may have numerous factors, when it comes to a plunge in end product demand the implication can be
only one: the US consumer is very ill, especially when considering that gasoline use has grown every year since 2012, despite fears that demand has topped out amid the growth of fuel efficient cars, urbanization and a graying population.
Upon learning the data, the industry’s immediate concern was about refiners and what it means for already sagging margins: U.S. gasoline demand is closely watched by traders since it accounts for roughly 10 percent of global consumption. U.S. refiners amassed large inventories that punished margins last year, but record gasoline demand and robust exports helped provided a firewall against further slippage. Now the industry faces the prospects of higher crude prices following global production cuts and fresh federal data that suggests their gasoline demand safety net may be eroding.
“It’s tough to base conclusions solely on the weekly data, which can be off significantly,” said Mark Broadbent, a refinery analyst with Wood Mackenzie. “If the demand is low as it the data shows, then it’s a going to be real problem for refiners.”
But it could be a far bigger problem in what it means for the broader economy.
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Enter Goldman which cuts right to the point: “A 6% fall in US demand would require a US recession”
As Goldman analyst Damien Courvalin notes, “implied demand data points to US gasoline demand in January declining 460 kb/d or 5.2% year-on-year. In the absence of a base effect, such a decline has only occurred in four periods since 1960 during which time PCE contracted.”
Goldman then adds that “to achieve the 5.9% decline suggested by the weekly data, our model requires PCE to contract 6%, in other words, a recession.”
So is the gasoline demand data accurate, and is a recession quietly gripping over the US, even as most other indicators are calmly flashing green?
Here Goldman refuses to believe the official data, instead reverting to its own model, which “adjusts” the data, to goalseek the decline to appear more manageable.
Given that the December PCE printed 2.8% growth, in line with its
performance throughout 2016, we find such a sudden collapse unlikely… our revised model for gasoline demand, which regresses year-on-year change in demand on analogous growth in PCE, pump prices, efficiency, number of public holidays and base effect, points to a 30 kb/d or 0.3% decline. Alternatively, given our economists’ forecast for PCE to grow 2.6% in 1Q17, such a decline would require a yoy efficiency gain of almost 20% vs. the maximum historical gain of 8%. Finally, the potential reduction in demand on account of the Presidential Inauguration on 20 January is offset by one less weekend day vs. the same period in January 2016.
Goldman then calculates what it believes is the accurate collapse in implied gasoline demand, instead of the 460k b/d reported by the EIA:
Our analysis identifies weekly yield and exports as systematically deviating from their final values and such biases suggest that demand could be revised higher by 190 kb/d. The EIA’s real-time export data still includes estimates and we see potential for the recent shifts in the Mexican gasoline market to exacerbate the overstatement of US exports by an additional 185 kb/d given (1) lower PEMEX refinery turnarounds, and seasonally lower demand exacerbated by the January 16% hike in prices. Adjusting for these lower exports points to US gasoline demand declining only 85 kb/d yoy in January, in line with our macro model.
Next, Goldman pulls the oldest trick in the book and suggests that it is not implied demand that is plunging, but supply that is soaring and is simply not being captured by the government:
we view the larger than seasonal ytd builds in US gasoline stocks as driven by transient supply factors rather than persistent demand issues. In the case of Mexico, we expect that at current set prices, gasoline demand will decline by 25 kb/d yoy in 2017, with demand falling by 75 kb/d if prices gradually reached global prices this year.
In conclusion, Goldman chooses to ignore the data, and to base its conclusion on its own fudged data:
Looking forward, we reiterate our outlook for strong global demand growth in 2017 and view the recent US gasoline builds as reflective of transient regional shifts in gasoline supply instead. Given our outlook for strong consumer spending in 2017, we believe that US gasoline demand growth will remain resilient this year at 60 kb/d, albeit below last year’s 150 kb/d growth because of higher prices. From a global perspective, these declines remain modest, especially compared to the 510 kb/d 2016 demand growth from the 40 countries we track.
So is Goldman right implying the EIA gasoline demand data is wrong, or is Goldman once again incorrect – as it has so frequently been over the past year – which would mean that, as the bank itself admits, the US consumer, and economy, are in the throes of a deep recession? We hope to get a partial answer tomorrow, when the DOE reports the latest weekly inventory data.