Seasonality of Demand

Well, with Thanksgiving, and a slight problem in transportation that got us home a day late, it is belatedly time to catch up a little on the latest TWIP report . As we look at reports of weak demand for gasoline and rising stocks, it is important to remember the context within which they are being reported.

Consumption of gasoline is somewhat controlled by season, as is overall oil demand.

Source EIA.

Demand therefore will normally decline in the winter months, and one can see this for the current gasoline demand plot:

Source (EIA )

Demand peaked in August and will now decline until late in February. (Although when, back in that time earlier this year, I looked at these curves I was unable to see a pickup in driving until after April). Looking at how the FHWA record of driving is progressing this month (bearing in mind that the running 12-month total is some months behind current). Overall driving across the country was up 2.5% in September on a year-on-year comparison, and this month there was a gain in all regions of the country. (All but the North-East showing a gain of more than 2%).

Vehicle miles driven reported for Sept 2009 (FHWA )

The changing demand for gasoline with the change in seasons, and the current drop is thus then reflected in the historic change in gasoline prices, which, when averaged from 1990 (taking the data from the EIA) gives:



This is just for regular gas (which is the first column in the table at the EIA that I have derived it from).

Prices have, on average, fallen to a minimum around the beginning of Christmas week, and peaked about the end of June (Morton Downey has a similar sort of chart in Oil 101 which shows that driving peaks at the beginning of August, on average, and is at a minimum in February.

If one looks at the last couple of years, from the EIA plot, one can see that there is, as with demand, a clear seasonality in price, which suggests that no-one should be unduly concerned over prices for the next two or three months, since they will likely fluctuate a little as a result of the normal fall in demand.

Gas prices over the last two years (EIA )

It will be interesting to see, however, what starts to happen as demand picks up, as it normally does, somewhere in towards the end of February and then more strongly in May. Because I suspect that it will be about then that supply might become a little tighter.

We have the Saudi’s at the moment agreeing to hold supplies to the United States at a constant volume, while they previously agreed to increase sales to China as both countries work to cement ties, and while the production from Manifa (h/t Leanan) is pushed back to 2015. Whether this will have any overall impact on the global market will likely become more evident as we move into the summer of next year.

TWIP this week focused on the change in ownership of the refineries in the United States over the past decade. It is best illustrated with this table that they provided.



As you can see, even though there are no new refineries, by improving capacity within existing plant, overall production numbers have increased. The footnote however recognizes the recent closing of the Delaware City refinery and the loss of 210,000 bd of refining capacity.

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!


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