While energy traders remain focused on weekly changes in crude supply and demand, manifesting in shifts in inventory of which yesterday’s API data and today’s EIA data was a breathtaking example, a much more troubling data point was revealed by the Energy Information Administration last week when it reported implied gasoline demand.
To be sure, surging gasoline supply and inventories are hardly surprising or new: they remain a byproduct of the unprecedented global crude inventories leftover from two years of failed OPEC policy which resulted in a historic glut. Last January, overall crude runs were up 500,000 bpd as refiners shifted away from diesel and other products to gasoline to chase more attractive margins amid a mild winter and sluggish diesel demand. The move led to an overbuild of gasoline stocks that lingered into the summer, punishing margins when they should have been at their strongest. This January, crude runs are at historic levels, up by roughly 300,000 bpd over last year.
So yes, both gasoline stocks and supply remain at extremely high levels, but what set off alarm bells is not supply, but demand: the EIA last week reported that the 4-week average of gasoline supplied – or implied gasoline demand – in the United States was 8.2 million barrels per day, the lowest since February 2012. And, as Reuters adds, U.S. refiners are now facing the prospects of weakening gasoline demand for the first time in five years.
Unlike excess supply, which may have numerous factors, when it comes to a plunge in end product demand there can only be one implication: the U.S. consumer is very ill, especially when considering that gasoline use has grown every year since 2012, despite fears that demand has topped out amid the growth of fuel efficient cars, urbanization and a graying population.
Upon learning the data, the industry’s immediate concern was about refiners and what it means for already sagging margins: U.S. gasoline demand is closely watched by traders as it accounts for roughly 10 percent of global consumption. U.S. refiners amassed large inventories that punished margins last year, but record gasoline demand and robust exports helped provided a firewall against further slippage. Now the industry faces the prospects of higher crude prices following global production cuts and fresh federal data that suggests their gasoline demand safety net may be eroding.
“It’s tough to base conclusions solely on the weekly data, which can be off significantly,” said Mark Broadbent, a refinery analyst with Wood Mackenzie. “If the demand is low as the data shows, then it’s going to be real problem for refiners.”
But it could be a far bigger problem in what it means for the broader economy.
Enter Goldman, which cuts right to the point: “A 6 percent fall in U.S. demand would require a U.S. recession”
Here Goldman refuses to believe the official data, instead reverting to its own model, which “adjusts” the data, to goal-seek the decline to appear more manageable.
Goldman then calculates what it believes is the accurate collapse in implied gasoline demand, instead of the 460k b/d reported by the EIA:
Our analysis identifies weekly yield and exports as systematically deviating from their final values and such biases suggest that demand could be revised higher by 190 kb/d. The EIA’s real-time export data still includes estimates and we see potential for the recent shifts in the Mexican gasoline market to exacerbate the overstatement of U.S. exports by an additional 185 kb/d given lower PEMEX refinery turnarounds, and seasonally lower demand exacerbated by the January 16 percent hike in prices. Adjusting for these lower exports points to U.S. gasoline demand declining only 85 kb/d year on year in January, in line with our macro model.
Next, Goldman pulls the oldest trick in the book and suggests that it is not implied demand that is plunging, but supply that is soaring and is simply not being captured by the government:
In conclusion, Goldman chooses to ignore the data, and to base its conclusion on its own fudged data:
Looking forward, we reiterate our outlook for strong global demand growth in 2017 and view the recent U.S. gasoline builds as reflective of transient regional shifts in gasoline supply instead. Given our outlook for strong consumer spending in 2017, we believe that U.S. gasoline demand growth will remain resilient this year at 60 kb/d, albeit below last year’s 150 kb/d growth because of higher prices. From a global perspective, these declines remain modest, especially compared to the 510 kb/d 2016 demand growth from the 40 countries we track.
So is Goldman right implying the EIA gasoline demand data is wrong, or is Goldman once again incorrect – as it has so frequently been over the past year – which would mean that, as the bank itself admits, the U.S. consumer, and economy, are in the throes of a deep recession? We hope to get a partial answer tomorrow, when the DOE reports the latest weekly inventory data.
Full article: Time Bomb In Oil Markets: Goldman Sachs Issues Warning (OilPrice)