Gasoline demand in the U.S. is continuing to rebound, albeit very slowly. The U.S. Energy Information Administration’s [EIA] latest This Week In Petroleum release shows that gasoline demand for the week ending April 17 increased for its second consecutive week (see figure). This marked the first back-to-back increases to gasoline demand since March 13. While the persistence of widespread stay-at-home orders across the U.S. has kept gasoline demand well below its normal volumes for this time of the year, this disparity is also beginning to decline: the demand volume for the week ending April 17 was down 41% on a YoY basis, compared to declines of 43% and 47% in the previous two weeks.
Source: EIA (2020).
The current rebound trajectory does suggest that gasoline demand will not experience a V-shaped recovery curve, at least not so long as stay-at-home orders remain in force in those states such as Texas and California that account for much of the country’s gasoline consumption. President Donald Trump stated last week that his administration will extend its current social distancing guidelines, which are currently set to expire at the end of April, “until we feel safe.” He added that an extension would potentially see the guidelines remain in place until June or later. Large states such as New York and California have already extended their stay-at-home orders: the former’s is now due to remain in place until at least May 15, while the latter has established six prerequisites that are unlikely to be met for at least several weeks yet given a shortage of COVID-19 testing equipment.
Front-month gasoline futures (XB1:COM) experienced no shortage of whiplash last week as the modest weekly demand increase coincided with the plunge of front-month WTI futures into deeply negative territory (see figure) as crude storage capacity reached its limit. Gasoline futures fell sharply on Tuesday in response to crude’s negative prices, only to mostly rebound on Wednesday as the latest demand data was released. The front-month gasoline price ended the week at $0.70/gallon after briefly approaching a one-month high. This disconnect between the prices of crude and gasoline caused the RBOB gasoline crack spread to move back into double-digit territory after trading in the low single-digits in recent weeks.
Source: Seeking Alpha (2020).
The United States Gasoline ETF (UGA) offers retail investors exposure to gasoline futures without the need for a futures account. It targets the spot price of New York Harbor conventional gasoline via holdings of short-term RBOB gasoline futures contracts. Its primary holding at present is June 20 contracts. Its assets under management value has surged over the last month (see figure) as investors have seen an investment opportunity in the form of gasoline prices that are at multi-decade lows, prompting a recent filing for an additional 60 million shares.
Investor interest in the ETF has been driven by the collapse of gasoline prices in response to the COVID-19 pandemic since early March that has been closely tracked by the ETF’s price (see figure). This collapse, combined with expectations of a V-shaped recovery to gasoline demand, have caused many investors to view UGA as an attractive investment opportunity in recent weeks. One concern with this thinking is that the ETF’s short-term focus has caused it to overstate the impact of gasoline’s slow rebound on gasoline prices. Whereas the May RBOB contract has increased by 20% in April to date, for example, The August contract has recorded a much more modest 4% gain over the same period. UGA’s price action is not reflecting the longer-term outlook to gasoline demand as a result.
Investors can expect gasoline prices to remain under pressure due to the massive inventories that have been built up following the demand disruption of the last month. Stocks for the week ending April 17 reached a record high (going back to at least 1990) of 263 MMbbl (see figure). This number is even more extreme when compared with seasonal levels, which are normally in sharp decline this time of the year in anticipation of the summer driving season. The combination of low seasonal demand in the coming weeks and high stocks will serve as a major headwind to gasoline prices.
Source: EIA (2020).
This expectation is reflected in the fact that the RBOB gasoline crack spread future contract price for May is 57% higher than that of August. Crack spreads are usually strongest between April and July due to seasonal trends in gasoline demand. Declines over that period of the magnitude that is being predicted by the futures market are incredibly rare. The futures market does not expect the price of RBOB to return to its pre-coronavirus levels until 2021 at the earliest. Such a dynamic does mean that any demand surprises would likely be to the upside, but such a development would require an unexpectedly fast resumption of normal demand volumes that is increasingly unlikely to occur given the poor state of U.S. coronavirus testing and contact tracing capabilities.
Whether or not UGA advances in the coming weeks will depend heavily on the speed and duration of the lifting of statewide stay-at-home orders. President Trump’s initial push to have the economy completely re-opened by May 1, which in turn followed the goal of re-opening by Easter, has been reversed, and last week he discouraged Georgia (unsuccessfully) from relaxing its own statewide order. If COVID-19 cases in those states that lift their stay-at-home orders earliest begin to rebound, then it is probable that gasoline demand will remain low into the early summer as the orders are reimposed. If, on the other hand, the number of cases declines rapidly even as workplaces reopen and employees return to their offices (due to warm weather, for example), then gasoline prices can be expected to rebound, although high stocks will inhibit gains to an extent.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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