Wednesday, April 1, 2009

The April 1 TWIP

The EIA’s “This Week in Petroleum” has noticed the same thing that I have been harping on for the past three weeks, namely that the gasoline demand has stabilized at about the same levels as last year. While they look at a slightly more refined set of numbers than I have been using their conclusion is
As indicated in the figure below, the year-over-year decline in gasoline demand experienced at the outset of 2008 deepened steadily throughout the summer, bottoming in September under the weight of very high gasoline prices, eroding economic activity, and hurricane related disruptions. Some recovery in gasoline demand is now evident, given newly published monthly data for January 2009, which showed that the decline rate had shrunk to 1.4 percent from the 4 – 6 percent rates seen last summer prior to September’s exaggerated drop. While the monthly January 2009 data again revised downward gasoline demand initially estimated from weekly data, the monthly figures showed a smaller decline than the 2.5 percent rate based on weekly data.

The figure below also makes clear that gasoline demand continued to strengthen in February and March, no matter how EIA weekly data are used to estimate growth.
And this is their figure:

Source EIA)

Even though the data are less accurate (and are later corrected) I have been using the graph at the bottom of the gasoline page, that shows demand, and if we look at this week’s version, one can see that we are now nudging in just under the levels of this time last year, but are sensibly (as the EIA noted) past the point of bottoming out.

Gasoline demand in the US (Source EIA)

This is actually only the second week since January that the curve has not shown an increase and it is too early to tell if we are going to see the spring ramp in demand that usually occurs, or how steep it might be. My own sense is that prices will not go up that much in the next few weeks, and thus demand will resume its upward trend, but I do disagree with the EIA analyst on what is likely to occur to the price of crude, and thus to gasoline prices, as the summer continues.

To reiterate my opinion, the OPEC cuts in production have now soaked up most of the excess of supply over demand. Thus control over the price will now transfer to OPEC, if there is any increase in demand for gasoline/crude as the summer develops. When one looks at the global picture, I suspect that we will see an increase in demand from this point forward, and that will, increasingly move the demand levels into the zone where OPEC will need to increase production to meet it. It will not be much, but does not need to be much, to return the control of prices into OPEC hands. And when it does, then I expect the price to crawl up to around $65.

The EIA analysis splits the process in two, with part being dependant on the price of crude, and the other part looking at the crack spread at the refineries. Recognizing that the refineries have cut back (as EIA note) and have extra capacity to increase production, I still feel that the increase in price that is going to happen with crude this summer, will drive the price of gas up some more. I doubt that it will get to $3, since that would weaken the recovery that might be starting to stir from the slide down that we have been going through. But those controls on price require a number of different folk to all agree to play in the same sandbox, and while they are a lot more disciplined about doing so than they have been in the past, I’m not sure I’d bet the farm on it. Interestingly gasoline imports to the USA are continuing to go up.

Gas imports to the USA (Source EIA)

And crude input to the refineries is also catching up with last year.

Source EIA

Notice how, in both curves, the historic lines from now through June trend upwards. The question will be how this years lines follow these curves. Anecdotally it does seem as though there is a little more optimism around, even though the layoffs are continuing, and thus perhaps the conservatism in spending may relax a little more.

But it is early days yet, and we will have to wait and see how this all continues to play out. Folks are being reminded that this is usually the season where gas prices rise the most.
Pump prices usually climb sharply between February and April as fuel demand picks up heading into the busy spring driving season, with families on vacation and students going on spring break.
But the good news for drivers is the trend for smaller-than-normal increases in gasoline prices is expected at least through the Memorial Day holiday at the end of May.
We shall see!



  1. I've been watching the EIA's gasoline demand graph with heightened interest since last summer, remembering always Stuart Staniford's posts over at the Oil Drum on the tight relationship between GDP and miles driven. There's one from 2005 presciently titled Driving Recessions. On the time scale of the EIA's graph, the weekly gasoline demand should be a proxy for href=> 92-93% of total vehicle miles travelled and it's available on a more timely basis.

  2. Argh, so that second link should be this one.

  3. Stuart used the fhwa site that I also reference when I do the monthly comments on vehicle miles driven. It is the one that shows the nasty drop-off over a year ago. However because it uses a rolling average it takes a little longer to show a pick-up after it has started to occur. Hence the return to the topic each month.

    See the last two plots from last weeks comment on the TWIP .