FocusSummer US driving season fizzles for fuel industry

06 September 2010 14:30  [Source: ICIS news]

Driving season underwhelming By Sheena Martin

HOUSTON (ICIS)--The “Summer of Recover” has become the “boulevard of broken dreams” as hopes for the US driving season and strong gasoline demand were dashed on the rocks of an ailing economy, an energy market analyst said on Monday.

“I think the summer driving season fizzled! Demand was up, but it was not consistent,” said Phil Flynn, author of the Energy Report.

The summer driving season, which typically begins with the last weekend of May and ends the first week of September, has usually been a key indicator for the year’s fuel demand.

The average gasoline supplied was 1.9% higher this year compared with the summer of 2009 for the weeks ended 28 May to 27 August, according to the Energy Information Administration (EIA).

However, an EIA analyst said that the modest demand growth was in line with consumer needs.

“One percent growth in the gasoline market should not be considered weak since the US population is currently growing at about that rate,” said EIA analyst Tancred Lidderdale.

But most agree the summer of 2009 does not make a fair comparison because the poor economy, and therefore gasoline demand, was so weak.

Lidderdale said that compared to the summer of 2007, gasoline consumption was about 2.3% lower, or 215,000 bbl/day. Retail gasoline prices at that time were $3-$4/gal compared to the most recent national average of $2.68/gal.

“For 2007, from a gasoline perspective, was probably a high watermark that won’t be achieved for another decade,” said Roger Ihne, principal in the oil and gas group at Deloitte Consulting. “The reason for that is multi-fold.”

New regulations and mandates have reduced gasoline demand, said Ihne. The foremost regulation that would lower demand was the requirement to blend renewable fuels with gasoline. In addition, any form of carbon tax legislation would negatively influence gasoline demand.

EIA analyst Neil Gamson said that early reports on demand for summer assumed a higher economic growth rate and therefore higher fuel demand. But an optimistic economic recovery did not play out.

“Consumers were very price sensitive and demand could have been better,” Flynn said. “Based off of data that we are seeing, the economy and the consumer seemed to hit a brick wall mid- to late-summer.”

Total supplied gasoline reached its high the week ended 23 July at 9,632 bbl. But in a month’s time, gasoline supplied fell to its summer low of 9,026 bbl.

“A lot of it has to do with the levels of unemployment,” Ihne said. “Clearly a good portion of gas demand is used for personal automobiles, and to the extent that unemployment remains high and the economy is not back to full force, I think that accounts for a good portion of [the fall in demand].”

Another aspect that has caused confusion for this summer’s driving season was strength on the production side.

“Gas demand and all fuel demand are up and that trend continues, though not as dramatically as we hoped,” Ihne said. “But offsetting that is just the build in inventories and just the fact that refiners ran pretty hard during the second quarter into the third quarter.”

On average for the summer, the EIA reported inventories about 5.5% higher than 2009. This summer’s gasoline inventory averaged 221.25m bbl compared with 209.78m bbl last year.

Due to the product surplus, the US became a net exporter of gasoline for the first time since 1961, Flynn said. This is because there is too much product for the US to consume, and the US has not been importing at seasonal levels because of high inventory levels.

Despite the lacklustre driving season, US refiners have not felt much pain - yet, according to market observers.

“The second quarter was just a very good quarter for all US refiners, majors as well as independents, all showed a tremendous increase [in profits] over last year - though last year was the low watermark,” Ihne said.

This summer has seen high refinery rates with more than a month of run rates greater than 90.0%. The week ended 27 August was only the third time in the past 8 weeks that capacity has fallen below 90.0%. Prior to the week ended 9 July, refinery utilisation rates averaged about 88% for the summer and were closer to 85% in April.

With inventory levels so high, refiners have already reduced capacity and could do even more if margins do not improve, Flynn said. With inventory building, prices and margins would weaken due to oversupply. Flynn said if the margins become weak, the market will see less capacity.

Ihne said that though product demand had increased, refineries were running hard and inventories were still building. This was counterintuitive to the summer gasoline season where usually gasoline stocks decline toward the end of the driving season, but this year stockpiles continued to increase. The week ended May 28 saw gasoline inventories at 219.0m bbl, while the week ended 27 August saw stocks at 225.4m bbl.

“That’s an anomaly and the ultimate impact of that will be felt in what demand does into the third and fourth quarters to the extent that the economy weakens and refinery margins decrease,” Ihne said.

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By: Sheena Martin
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