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.

Driving numbers continue to rise

Having been away for a couple of weeks, it is time to settle back to look at some of the regular data that I post on when not traveling. The first of these is the weekly visit to This Week in Petroleum (TWIP) to see how the demand for gasoline is holding up, and to note what the EIA considers important this week. To comment on the latter first, and at the time where the emphasis has changed from driving to heating needs, this week the site comments on the high level of available fuel going into the winter – which comes about, according to the article, in some part because of the collapse last winter, yet the inertia in the oil business which kept the system going long enough for these surpluses to develop. Natural gas stored, for example, is at a volume that is 16% above that of the 5-year average. Similarly coal stocks and oil stocks are high – we will have to see whether the coming of an El Nino will have much effect.

This one does not seem to be typical (which would mean a warmer winter, and less need for fuel) and some caution is now being expressed.

But with this "black sheep" El Niño, as he calls it, "as you move to the central and eastern regions, you start to see pitfalls and [different] opinions."

What that means for the natural gas-reliant Midwest and home-heating-oil usage in the Northeast is that El Niño's influence could wane as it crosses the country. As a result, other weather phenomena could at times take precedence, so a warm winter isn't a given, Schlater says. "From the central Rockies to the Ohio Valley, you could see temperature volatility," he says.
Adam Sieminski, an analyst at Deutsche Bank, concurs and notes that the winters of 2002-03 and 2004-05 had weak to moderate El Niños but were very cold in the Midwest and East. "While we do not anticipate a repeat of those events, the pattern is shaping up such that the 'warm winter' may be confined to the Pacific Northwest to the Northern Plains, making the East favorable for colder-than-normal conditions, possibly along the lines of 2004-05," he said in a note.

Earlier predictions of a strong El Nino and resulting impact on climate and global temperatures seem now to be fading into a forgotten past. But with the situation now indeterminate, we’ll just have to wait and see how the weather turns out.

Getting back to the TWIP, one of the graphs that is interesting to watch is domestic crude production, which has been increasing for a while – wonder how long that will last?

Domestic crude Production over the past year (EIA )

But it is gasoline demand that shows that something at least is growing in the economy.

(Source EIA).
The downturn marks the seasonal transition from producing gasoline for summer driving, to preparing fuels for the winter. Nevertheless, if one goes over to the FHWA for the monthly traffic report for July, one sees that travel was up 2.3% over July 2008. The Texas area was highest with a 2.9% increase, while the North East was held to only 1.4% gain.

This result means that the 12-month rolling average for Vehicle Miles Driven (VMD) now definitely shows an uptick over the depth of the recession in driving.

Moving 12-month total of VMD on all Roads (source FHWA

The rise back to the old peak levels will likely take more than another year or so, but will help indicate where we stand. (Bear in mind however that July is now 3-months ago, and so the recovery today should be more marked). Urban driving, while still up over last year, is not as far along on this as is rural driving, where the numbers now nearly match this time in 2007 – before the recession and gas prices both came seriously into play.