Thirst for Gasoline Fuels Oil Rally Drivers’ demand for gas has been the fire behind oil’s recent rally By TIMOTHY PUKO / March 30, 2016 10:27 p.m. ET
Falling oil prices have been a boon to drivers. Now, the thirst for gasoline is revving up the oil market. Increasing gasoline demand has been a force behind the recent oil rally, which has lifted U.S. crude prices 46% since early February. Several factors have combined to produce a rise in gasoline consumption, including an unusually mild winter and an economy that added more than 200,000 jobs in both February and March. Consumers also are buying more sport-utility vehicles and trucks, which burn fuel less efficiently. Meanwhile, pump prices are among the lowest in 12 years. The result: U.S. gasoline demand hit record levels in March. Government estimates released Wednesday show consumption averaged more than 9.4 million barrels a day in the four weeks that ended Friday. That is a level usually found only during peak summer driving season, and it compares with roughly 8.8 million barrels a day in March of both 2014 and 2015.
On Wednesday, oil edged up 0.1%, to settle at $38.32 a barrel, up 14% this month, on the New York Mercantile Exchange. Gasoline futures lost 1.2%, to $1.4364 a gallon, but are up 60% from the sevenyear low they hit less than two months ago, outpacing crude and other oil-products markets.
“Can you just imagine how many driving trips are being planned with gas at $1.65 a gallon,” said James Cordier, president at Optionsellers.com, a commodity trading adviser that manages about $100 million in assets. For every barrel of crude that goes to a U.S. refinery, about half gets turned into gasoline, according to U.S. government data. That makes gasoline by far the most common product from crude, and U.S. drivers are the biggest consumer, accounting for about a third of global demand, according to the International Energy Agency. Drivers’ rising fuel consumption wasn’t enough to halt a retreat when oil prices dropped by more than 7% from a recent peak on March 22. And gasoline demand alone is unlikely to be enough to spark another oil rally. Gasoline matters less for market sentiment than news about crude supply, said investors, some of whom already have factored strong gasoline demand into their oil forecasts.
But gasoline demand may be the most stable contributor to oil prices. A preliminary deal among Saudi Arabia, Russia and other major oil-producing nations to cap output was the biggest catalyst for crude’s recent surge, many analysts said. Yet, that production freeze has yet to materialize, and Kuwait’s announcement this week that it could restart production at another oil field cast further doubt that a deal can come together. Even if it does, Iran’s plans to increase production by 500,000 barrels a day could mean global supply increases. Moreover, U.S. producers have spent seven months holding output steady at about nine million barrels a day, defying the conventional wisdom that low prices will force domestic producers to throttle back substantially. Gasoline demand, meanwhile, is proving a reliable contributor to the supply-demand equation for oil. “If demand isn’t there, the rally can’t take off,” said Darwei Kung, portfolio manager of the $2.1 billion Deutsche Enhanced Commodity Strategy Fund. Only a few weeks ago, traders feared that increasing stockpiles of gasoline and the sharp drop in driving to start the winter would create a glut of both crude and gasoline. Many had thought “gasoline demand had grown stale. Obviously that has changed,” saidNicolas Robin, a commodities-fund manager at Columbia Threadneedle Investments, which manages $472 billion. Gasoline demand rose 8.5% in March from a low in January, when it had dropped well below its 10-year average for the first time since last spring, according to U.S. Energy Information Administration estimates. An unusually warm February and March, after a snowy January, helped revive last year’s trend of strong demand. U.S. drivers drove a record 3.1 trillion miles last year, according to the U.S. Transportation Department. The Energy Information Administration expects that to increase 2.1% in 2016 to a record of 3.2 trillion miles, citing rising population and employment, and low retail prices.
Pump prices have dropped to their lowest levels since 2004, averaging under $2 a gallon every day this year until March 24, according to automobile club AAA. In 2015, the average driver saved $565 on gasoline compared with 2014, the club’s spokesman said. The gasoline-demand trend could continue, thanks in part to vehicle sales in the U.S. and China that are up 10% to 15% and the renewed preference for cars that burn more fuel,Citigroup Inc. said in a recent note. Analysts at J.P. Morgan Chase & Co. recently recommended trades that would benefit from July gasoline futures rising compared with September’s, saying the recent demand growth foreshadows strong demand coming this summer, when gasoline consumption tends to rise. FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.