Oil is at the lowest since the start of the Ukraine war today but that data that's weighing on crude has many market participants scratching their heads and some accusing the government of outright manipulation.
In question is US gasoline demand. Official weekly data show that July US gasoline demand was below 2020 levels.
Intuitively, that doesn't make sense. Yes, gasoline prices are much higher than 2020 but the world was in the midst of a pandemic and far more people were working from home in the summer of 2020.
But the data is what it is and yesterday's numbers were soft once again at 8540k. That was the main reason for the drop in oil yesterday and the decline through $90 today for the first time since the start of the Ukraine war.
I'll take a look at some factors for why the data may be right and why it might not be.
Why it might be true:
1) Elasticity
Gasoline is traditionally one of the least-elastic commodities -- people need to drive. However there's a limit and we may have it it in early July as gasoline cracks below out and US prices hit record highs. Around the July 4th weekend there were clear signs of demand destruction. Perhaps we hit a breaking point and drivers are cutting discretionary miles whereever possible.
2) Efficiency
There's no doubt that cars are getting more efficient and people are switching to EVs and hybrids. That's a secular trend that will weigh on gasoline demand in the long term. But compared to a year ago? The auto cycle is a long one and it will chip away at demand, but at a slow pace.
3) Flying more
The idea is that people and families are flying more this summer and driving less. Intuitively it makes sense. People were stuck driving to nearby locations for vaction for two years and now are branching out further. We've all see the nightmares at airports and flying is as busy as ever. Is that killing driving demand? Possibly but given that so much of driving is commuting and errands, it's hardly believable that it could account for a 10% decline in demand.
4) Running on empty
According to GasBuddy, US retail gasoline prices have now fallen for 49 straight days. Following the gasoline price shock in late June, we could be seeing a behaviour shift in drivers where they are waiting longer to fill up gas tanks. That has been the right move for the past seven weeks and the drawdown in collective gas tanks could temporarily be masking demand.
5) Commercial pumps
The EIA data measures commercial gasoline demand -- so from gasoline stations rather than consumers -- so similar to the above, we could be seeing gasoline stations running with less inventory. That makes sense because right now the value of inventory is falling daily. Again, this would only be masking demand.
6) A sign of recession
All the talk of recession may have people cutting back on driving and spending. We've heard from Visa lately that's not the case but weekly gasoline demand is some of the most up-to-date data out there. But if gasoline demand is falling this rapidly, what does it say about the rest of the economy?
7) Price is falling
Both crude and gasoline prices are falling and today oil is at the lowest since February. Could implied gasoline demand data really be fooling the market? There are reports on physical tightness and paper crude could be liquidating but I have a hard time believing that US demand figures are a major reason for oil weakness.
Why it might not be true:
1) EIA data is subject to major revisions
The EIA does its best to get out petroleum data weekly but it's a tough job and subject to all kinds of assumptions. HFI Reserach notes that the data is subject to big revisions when the month numbers are finally released. So traders may be simply looking at bad data that will be adjusted.
2) US gasoline storage remains at a five year low
Given cracks and pressure on to boost gasoline output, refiners have been working hard this summer. Combined with supposed lower demand, inventories should be moving up rapidly. They've made some progress but are basically flat in the last month and still at five-year lows. This is another HFI chart and their explanation is well-worth reading.
3) Refiners aren't seeing a slowdown
US refining giant Valero was asked about falling gasoline demand last week and Gary Simmons, Chief Commercial Officer, had this to say:
"I can tell you, through our wholesale channel there is really no indication of any demand destruction... In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we're not seeing it in our system."
4) Alternate data doesn't line up
GasBuddy tracks retail gasoline demand at the pumps in the US and they showed a 2% rise in gasoline demand last week while the EIA showed a 7.6% drop. Morevoer, last week was the strongest demand of the year from GasBuddy.
Another one is vehicle miles traveled from the US Federal Highway Administration. It's only data though May but it shows vehicle miles traveled up year-over-year through May. We'll get the June data in the middle of this month.
5) Conspiracy
In markets, everyone is a conspiracy theorist. The EIA shut down reporting in late-June -- supposedly due to a server malfunction -- since they have returned, the gasoline demand data has been consistently bad. Maybe there's an issue with reporting or maybe it's a conspiracy.
It's not just random people on the internet either, Jan Stuart, global energy strategist at Piper Sandler, yesterday called the data 'crooked'.
At the end of the day, traders have to trade what's in front of them. Right now it's a crude chart that's breaking support after a major period of consolidation -- that's not good. The calls for a recession are growing louder crude demand has a long history of following global growth. There are supply factors that will eventually be bullish -- like the SPR releases ending in October -- but that's months away and OPEC is still adding some barrels.
For now, oil trades with an 80-handle and the momentum is lower.
