US drivers have hit the roads in droves this summer, making it difficult for refineries to keep pace with surging demand for gasoline.
During the week ended July 31, 2015, US refineries processed a record 17.075 million barrels of crude-oil per day and ran their plants at more than 96 percent of their nameplate capacity.
Americans consumed more than 10.1 million barrels of gasoline per day in July, an increase of 638,000 barrels per day from a year-ago. New-car sales also reached an annualized pace of 17.5 million units in July, the highest level since 2005.
The strength of the 2015 summer driving season marks a key inflection point for US consumers.
US gasoline demand trended steadily higher from the late 1990s until 2006-07, when consumption crumpled after running into two formidable walls: the Great Recession and gasoline prices that surged to more than $4 per gallon in summer 2008.
Although growth in US gasoline consumption moderates during recessions, Americans’ appetite for petrol usually recovers with the economy. But US gasoline demand never really rebounded from the 2007-09 downturn, prompting some pundits to claim that consumption of this transportation fuel had reached a plateau.
This extended weakness in US gasoline demand reflected the subpar economic recovery and the quick rebound in oil and gasoline prices that occurred in 2009 and 2010. With gasoline prices back at elevated levels and the economy taking two steps back for every one step forward, households had little incentive to change their behavior.
But the collapse in oil prices has stimulated US consumption, pushing gasoline demand to a record high.
During Valero Energy Corp’s (NYSE: VLO) second-quarter earnings call, management highlighted the significant pent-up demand in the US gasoline market as an upside catalyst:
I guess what I would say is we certainly expected some price demand elasticity for gasoline with the fall in flat price. And we’ve seen that, and we didn’t really know exactly what the magnitude of the pent-up demand would be. And it’s been a very pleasant surprise, and I think we do expect that that response will continue into the future.
There’s an old saw on Wall Street that the cure for low oil prices is low oil prices. In other words, falling oil and gasoline prices prompt consumers to do more driving and energy producers to cut back spending on exploration and development.
Although the magnitude of the uptick in US demand may have surprised Valero Energy’s management team and other industry executives, the 650,000 barrel per day increase in US gasoline consumption occurs at a time when domestic oil production grew by more than 1 million barrels per day.
Despite huge cutbacks in drilling activity and capital expenditures, these efforts have yet to produce a meaningful decline in US oil output on a year-over-year basis, suggesting that the price of West Texas Intermediate could tumble into the $30s per barrel this fall.
Throughout the energy sector’s recovery rally earlier this year (a false spring), we warned of a second leg down for crude-oil prices, with the selling pressure intensifying in fall and winter, when refineries usually shutter some of their capacity for maintenance and upgrades.
Valero Energy and other refiners have warned that this year’s turnaround season could involve more outages than usual because the industry ran flat out in the spring and summer to take advantage of robust demand for gasoline and favorable crack spreads.
And even after record refinery runs and gasoline demand this summer, resilient production and overseas imports have ensured that US crude-oil inventories remain about 26 percent above their five-year average for this time of year.
This overhang, coupled with the prospect of a seasonal reduction in demand, suggests that oil prices could suffer significant downside this fall—a view we’ve espoused since March 2015. (See Reading Oil’s Futures.)
But record gasoline demand this summer and the prospect of even lower oil prices in the fourth quarter suggest that US retailers will enjoy a strong holiday shopping season this year.
Our graph plots the year-over-year change in monthly US gasoline demand during the summer driving season against the contribution of personal consumption expenditures (a proxy for consumer spending) to fourth-quarter economic growth.
The positive slope of the line in our graph suggests that strong gasoline demand during the summer driving season sets the stage for robust consumer spending during the fourth quarter—a critical period for retailers.
For example, US gasoline demand jumped 2.09 percent year over year in summer 2006, while personal consumption expenditures contributed 275 basis points to the growth in fourth-quarter gross domestic product (GDP).
In contrast, when US gasoline demand shrank 1.89 percent in summer 2012, personal consumption expenditures added only 78 basis points to fourth-quarter GDP growth.
Two possible explanations for this correlation come to mind.
First, US gasoline demand tends to strengthen during periods of low or falling oil prices; lower energy costs boost consumers’ disposable income and encourage incremental spending.
And an uptick in US fuel demand suggests that Americans’ propensity to consume is on the rise. If drivers loosen their purse strings for summer travel, they may also be more inclined to increase their spending on gifts during the holiday season.
In June and July 2015, US gasoline demand surged almost 6.3 percent from year-ago levels—the strongest growth rate since the 1980s. If history is any guide, these trends bode well for fourth-quarter retail sales.