Author: Brynne Kelly 4/11/2021
As we approach summer driving season in the US, all eyes are on gasoline markets, hoping to see some positive demand data points in the coming weeks.
Before jumping into market data points to watch, we should first define 'driving season'. While the actual dates bookending driving season are disputed, generally the period between the US holidays of Memorial Day and Labor Day is accepted and known as a period of particularly robust gasoline demand—hence the nickname, driving season. For summer 2021, the EIA expects U.S. gasoline consumption to increase compared to last summer, but it doesn’t see demand returning to 2019 levels. Gasoline consumption from April to September will rise from 7.81 million b/d in 2020 to 8.84 million b/d in 2021 . Consumption in 2021 will peak at 9.1 million b/d in August. For reference, we look at monthly US gasoline sales since 2015 compared to the pre-2020 5-year average (black bar below).
The gold bars above represent preliminary data for the first three months of 2021 and the lime green bars represent the EIA summer-21 demand forecast. Orange bars represent 2020 monthly demand. The first two months of this year, demand fell short of not only the 5-year average but also those seen a year ago. The latest available EIA information indicates that gasoline deliveries (a measure of demand) for February 2021 fell by 11.6 percent from the prior year, to average 7.9 million b/d. By March however, demand seems to have recovered to the 5-year average and 18% above year-ago levels. As a result, we have seen a steady rise in gasoline futures prices.
Similar to crude oil, gasoline prices have pulled back as the market awaits confirmation that demand will indeed materialize. The question now becomes whether or not the anticipated rise in demand is already priced in.
Summer Gasoline vs ULSD
A steep increase in demand for gasoline would likely encourage US refiners to operate at their highest utilization rates of the year. Gasoline continues to dominate refinery yields as the product accounts for the vast majority of the average refined barrel across the US. Even so, an increase in gasoline production comes with an increase in diesel supply. The relationship between gasoline and diesel prices is a reflection of how well the market can absorb an increase in production of both products during max summer refining output. The chart below reflects the summer (May-September) spread between RB and HO futures. In the preceding two years, the summer gasoline strip has expired below the summer diesel strip (purple and violet lines below). By sharp contrast, the 2021 summer spread shows gasoline trading at almost a $0.14/gallon premium (green line below), but by summer 2022 the spread is closer to flat (blue line below).
On average, May has represented the month of peak diesel demand over the past five years, but diesel demand commonly increases in the spring and autumn as the seasonality of agricultural production factors in. The combination of diesel demand slightly relaxing during the summer and refineries increasing their gasoline output (therefore pushing more diesel into the market) is driving the rally in the RB/HO spread.
We currently have gasoline prices and the RB/HO spread trading near their highs, which is why all eyes are focused on upcoming gasoline demand data. Will simply meeting summer demand forecasts be enough to push prices higher from here, or has the increase already been priced in?
Refinery utilization
As gasoline demand picks up around Memorial Day, refineries are generally economically incentivized to maximize the use of their operable capacity. The recovery in refinery utilization this year was handicapped by the winter storms in Texas (gold line below) but now appears to be back on track. From now until September, utilization rates historically trend higher (black line below, 5-yr average).
It will now be up to summer crack spreads to provide the refinery complex with the incentive needed to increase output from here.
Summer Crack Spreads
As more refineries restart, margins are at risk of softening. Improving gasoline demand has refiners shifting their yields away from diesel, particularly as the summer driving season nears and the gasoline-to-diesel spread widens, putting a lid on coking margins. As of last Friday's close, summer-21 gasoline crack to WTI settled close to strip highs at $22.405/bbl (green line below) with the summer-22 spread not far behind at $21.26/bbl (blue line). This is double where the spread was a year ago and even above 2019 levels (black line below).
US President Joe Biden in a March 11 speech pledged all US adults would be eligible for the COVID-19 vaccine as soon as May 1, in an effort to bring the nation "closer to normal" by the July 4 Independence Day holiday. The accelerated rollout, coupled with the signing into law of a $1.9 trillion stimulus bill has raised hopes for a strong demand recovery as soon as early summer, analysts said. The widening gap between expected demand increases and tightened supply has pushed RBOB cracks steadily higher since mid-February.
Gasoline Blending: Butane and Ethanol
Effective January 1, 2021 the Environmental Protection Agency removed a requirement to test for volatile organic compounds (VOCs) and aromatics in RBOB — an ethanol-ready gasoline blendstock common in urban areas in the US. Benzene, sulphur and RVP limits will be the only requirements that remain, potentially allowing slightly more butane blending during the summer. The change will rely on gasoline volatility control by limiting RVP at 7.4 psi as the measurement of compliance for reformulated gasoline.
Normal atmospheric pressure varies with location, but averages about 14.7 lbs. per square inch (psi) at sea level. If a liquid has a vapor pressure greater than atmospheric pressure, that liquid boils. In the summer, when temperatures can exceed 100 degrees F in many locations, it is important that the RVP of gasoline be well below 14.7 psi. Otherwise, the fuel may build pressure in fuel tanks and gas cans, and it can boil off lighter components in open containers. Gas that is vaporized ends up in the atmosphere and contributes to air pollution.
Butane, which has an RVP of 52 psi, can be blended into gasoline in higher proportions in the winter because the vapor pressure allowance is higher. Historically a typical winter gasoline blend may contain 10% butane, dropping to 2% or lower in the summer. Butane is a cheaper blending component than most. Presently, the spot price of butane is under $1/gallon. However, the change in VOC testing doesn't appear to be putting material pressure on gasoline prices even as spot butane futures sell off (blue line below vs black line).
The Renewable Fuel Standard (RFS), also known as ethanol mandates, is a policy that forces increasing amounts of biofuels into the U.S. fuel supply. Every year, the EPA — the agency in charge of administering the policy — decides how much biofuel has to be blended that year by setting an annual target. Almost all of the gasoline sold in the United States today contains 10 percent ethanol (E10). Therefore, the forecast increase in gasoline demand will increase the amount of ethanol to be blended into the gasoline pool. Higher ethanol prices will mute the impact that blending cheaper ethanol into the gasoline pool will have.
EIA data revealed another draw in domestic ethanol inventories last week, with stocks falling to a 20-week low, as blending demand, while down slightly on the week, remains at pre-pandemic levels. According to EIA forecasts, ethanol blending into the gasoline pool will likely average 898,000 b/d this summer, up from 797,000 b/d last year. Consumption is expected to increase to 910,000 b/d next year.
Gasoline prices have been a driving force moving the oil complex higher. But, at current levels, it's reasonable to ask whether bullish outlooks for the second half of the year are already priced in.
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EIA Inventory Statistics Recap
Weekly Changes
The EIA reported a total petroleum inventory BUILD of 6.00 million barrels for the week ending April 2, 2021.
YTD Changes
Year-to-date total inventories in 2021 are DOWN by 8.60 million barrels.
Inventory Levels
Commercial Inventory levels of Crude Oil (ex-SPR) compared to prior years reflect the imbalance between oil and refined product production created by the winter weather in Texas.
