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QuickHit: Permanent demand destruction in fuels markets

 In QuickHit, Visual (Videos)

Patrick De Haan, Head of Petroleum Analysis at GasBuddy, joins us for this week’s QuickHit episode where he discusses the loss of demand in gasoline (petrol) and fuels markets in the wake of Covid-19. How much gasoline demand has been lost and when will it recover? How far have prices fallen – and how long will they remain low? Patrick explains the dark clouds that have formed around petroleum and when we’ll get back to a “sense of normal.”

 

GasBuddy helps motorists save at the pump by showing low gas prices across North America and down under in Australia. Patrick has been with GasBuddy for over a decade basically helping millions of users understand what goes into what they’re paying at the pump and to understand how complex issues can influence their annual fuel bill.

Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Patrick on Twitter: https://twitter.com/GasBuddyGuy

Check out the CI Futures platform to forecast currencies, commodities, and equity indices: https://www.completeintel.com/ci-futures/

 

***This QuickHit episode was recorded on September 16, 2020.

Last week’s QuickHit was with TankerTrackers.com co-founder Samir Madani explaining half a billion barrels of oil going to China right now.

 

 

 

Show Notes:

 

TN: I was following you particularly in the last couple of weeks going into the U.S. Labor Day weekend in early September and then coming out of it. It seemed to me that consumption going into Labor Day seems pretty strong but coming out of it seemed like things really fell off even on an annualized basis. Can you talk us through what is that telling you if anything meaningful and is that telling you anything about the recovery from COVID, the consumption recovery?

 

 

PD: We’re just entering this post-summer time of year. That we really get a good idea of where we’re going and obviously, COVID19 has really influenced every angle of what’s normal for this time of year.

 

 

What’s normal is that demand for gasoline typically drops off notably. Kids are back in school. Vacations are done. Americans are staying closer to home. But this year, a lot of what we’re seeing in the media, the current events headlines are playing into how Americans are feeling and that plays into where they go. How often they do and so all of this is really factored in and probably one of the top economic indicators of what to expect.

 

 

And so far in the week after Labor Day, we did see a nice run up to Labor Day. I think it was probably one of the best summer holidays, which gave us some glimmer of optimism. But now, we’re coming down from the sugar crash and we are starting to see demand fall off. Where we go from here? I think, we’re at a turning point. Will we see demand continue to kind of plunge or will we start to see a little bit more optimism? I think obviously a vaccine would be the holy grail. But for now, really we’re kind of looking at seasonal trends that may be enhanced by a lot of the restrictions motorists are contending with state by state.

 

 

TN: Next to my office is a commuter lot, and that commuter lot has been closed. We’re outside of Houston. So, people get on a bus to go into downtown Houston for work. That’s been closed since February. Yesterday, I noticed they’re mowing the lawn. They’re getting it ready to reopen. How much of an impact are those commuters, who are driving, who would normally use bus into a downtown? Is that having an impact on the consumption and on the demand or is it pretty marginal at this point?

 

 

PD: At this point, we’ve seen a lot of demand come back. We were at one point down 55% in March or April and basically everyone stayed home. Now we have rebounded. We’re still down about 15 to 20% compared to last year. But it’s that last 15% percent that’s probably going to take more than a year, maybe, two years to fully come back as businesses slowly reopen. That’s a really good benchmark of how quickly that last 15 percent in demand is going to take and I think at this case, it’s going to take quite a long time for people to be comfortable getting on mass transit.

 

 

I have the same thing here in Chicago. I was recently down in Northwest Indiana. There’s a lot of commuters that come up from Indiana during the day. And again a massive parking lot satellite imagery shows that parking lot filled for the last 10 years consistently, suddenly it’s empty. Some of the big businesses, they’re not really talking about getting a lot of people back into the offices by the end of the year. All the focus really is going to be on early next year or if there’s a major disruption like a vaccine that would cause businesses to move their timelines up. But for now, when it comes to gasoline, distillates even jet fuel, it looks rather bleak.

 

 

TN: Yeah, I think so and I think we’re getting to that point of the year. Even if there was a vaccine tomorrow, I don’t know if people would necessarily call everyone back before the end of the year. It just seems like we’re getting into a really awkward time where it’s hard to tell people to come back. Is that the sense you get as well? I mean JP Morgan aside, right? You know, they’ve called everyone back on September 21st but do you see, are you seeing much activity around other people heading back into the office?

 

 

PD: Not a whole lot. It’s really interesting actually. I was talking to my wife this morning, who does investment bacon and she said that some of the JP Morgan traders had been called back earlier only to be now sent back home because of a coronavirus in the office. That’s kind of the risk that businesses are taking here. That’s why it’s going to take a while for us to get that confidence back to go in offices.

 

 

Now even more so than ever, businesses are becoming accustomed to this new era and telecommuting is likely to really surge. That could mean a permanent demand destruction of at least 5% maybe even more than that. Maybe we don’t get 10% of demand back and it takes years for us to start building up our confidence to get back on planes, to get back on trains and that’s where the dark clouds are forming for petroleum is that the longer we remain in this era, the longer it’s going to take us to get that confidence back to go back to some sort of sense of normal.

 

 

TN: Since you focus on gas prices, petrol prices. What does that do if we don’t recover that 10% in commuter consumption or driver consumption? Putting even the jet fuel stuff aside. What does that do for overall gasoline pricing in the U.S.? Are we at a kind of a step lower than we’ve normally been or do we still see say intermittent seasonal volatility where we go up to normal prices? What does that look like for the average consumer?

 

 

PD: I think it was back in 2015 at some point when OPEC opened the Spigot up and oil prices were low. We all had this phrase “it was lower for longer.” That’s a phrase that may be in a different use here but that’s what we may be looking at for both gasoline and distillate prices lower for longer because of this very slow return of demand. And so I foresee that gasoline prices will struggle for quite some time. Maybe, a period of years to get kind of back into where they normally would go and it’s because of this demand destruction that could stick around. I think most of this winter motorists will be looking at prices under $2 a gallon. Of course barring the traditional high-taxed, high-priced states like California and Hawaii where the sun is shining and unfortunately right now they have a lot of forest fires but for everyone else it’s going to be a sub $2 gallon winter. Next summer is probably going to be another good one. But the future next summer does get a little murky if we do get some demand back. Keep in mind that we’re making a lot of permanent decisions today on the era wherein that is oil production has been shut down, drilling is offline, even some refineries in Europe are shutting down. And if we do get some sort of bounce, that could lead these shutdowns today, could lead to higher prices whenever we do turn that corner.

 

 

TN: Just for context when you say sub $2 a gallon? How much is that off of normal prices? What are normal prices? Is it 2.53 dollars?

 

 

PD: It typically is in the last few years we’ve held remarkably stable somewhere in the mid to upper two dollar gallon range nationally. So, very, very rarely with the exception of I believe early 2016 and early 2015 have we seen the national average spend a considerable amount of time under two dollars.

 

 

TN: So you’re saying 30% off of what had been traditionally normal prices? Is that fair to say for the next maybe 12 months or something?

 

 

PD: Yeah, I think six to 12 months and potentially beyond that and the amazing thing about those prices is before this, that would entice motors to hit the road. Now, it’s not really doing a whole lot.

 

 

TN: If gasoline prices are 30% off of normal but commuting is down these sorts of things. Is there an upside? What are you telling your clients about this?

 

 

PD: The upside here potentially and my clients at GasBuddy members so we’re looking at this a little bit differently. Is that low prices probably here to stick around? I think given the situation, low prices will actually keep America using more petroleum than the early era 2014, 2013 when motorists were really looking at Prius’s, EVs. I think that’s going to really slow down given the environment of low prices kind of incentivizing motorists not to ditch their fossil fuel cars at this point.

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