Jul 17 / Victor Arduin

The driving season in the U.S. increases gasoline demand, but crack margins slump

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"Early this year, several factors fueled optimism for a strong 2024 driving season, particularly after harsh winter weather, including severe cold temperatures, knocked US refineries offline."

The driving season in the U.S. increases gasoline demand, but crack margins slump

  • The bullish outlook for the driving season has been affected in recent weeks. Despite the increase in gasoline consumption, the build-up of stocks has removed support for refined product cracks, which have been lower in 2024 compared to previous years.
  • Gasoline prices typically increase during the summer due to the shift to more expensive summer-grade fuel. However, refinery profit margins are being squeezed by the significant growth in gasoline stocks, which reached 126 million barrels by the week ending July 12th.
  • However, there are market risks that could impact petroleum markets in the coming weeks. The hurricane season could potentially damage US refining facilities located on the Gulf Coast (PADD 3).

Introduction

Over a month into the driving season, energy market indicators in the United States are showing signs of change. Gasoline demand rose 2,38% (212 thousand barrels per day) in June compared to May. Demand is forecast to rise again in July by 1.3% (118 thousand barrels per day) compared to June. Currently, the implied demand moving average is very close to the same level seen in 2023.

However, despite these bullish indicators for gasoline, the picture isn't entirely promising. The RBOB crack spread, which represents a refinery's profit margin from converting crude oil into gasoline, has dropped significantly. Compared to the same period last year, it's down a staggering 41.3%. Even this month alone, it's retreated more than 8.5%.

Demand alone doesn't paint the whole picture in the energy commodity landscape. Over the past few months, rising gasoline demand has also been accompanied by an increase in US refined products inventories. In this report, we'll discuss why the driving season hasn’t result into higher gasoline margins for refineries.

Image 1: US Gasoline Implied Demand (Million Barrels)

Source: EIA

Image 2: RBOB and HO Futures Crack Spread (US$/bbl)

Source: Refinitiv

Contrary to expectations, the gasoline outlook has been more moderate

Early this year, several factors fueled optimism for a strong 2024 driving season, particularly after harsh winter weather, including severe cold temperatures, knocked US refineries offline. Examples include the Port Arthur refinery in Texas, a 238,000 bpd facility that experienced a power outage, and the Corpus Christi refinery with production capacity 343,000 bpd, also located in Texas, which was impacted by the winter storm.

The refinery utilization rate consequently plunged to just over 80% in mid-February, driving up bullish outlooks for refined products, particularly gasoline. Gasoline inventories, which began the year at approximately 244 million barrels, fell to an average of 228 million barrels by April. During the winter, gasoline inventories typically build up to meet the surge in summer demand.

Gasoline prices traditionally rise during summer due to the switch to more expensive summer-grade fuel. However, a key factor dampening refinery profit margins is the increase in gasoline stocks, which began to rise significantly in May and June, reaching 233 million barrels by the end of July. This represents an increase of 7% compared to the same period in 2023.

Image 3: US Gasoline Stocks (Million Barrels)

Source: Bloomberg

Hurricane season the major bullish risk ahead

Days of supply, a key indicator of supply and demand dynamics in the fuel market, reflects that despite the build in gasoline stocks, higher demand is preventing an increase in this metric. Consequently, any supply interruption poses a risk to the market.

There are risks presented in the energy complex that could impact petroleum products in the coming's weeks. NOAA has said that La Niña and warmer-than-average ocean temperatures could be major drivers of more intense tropical activity. Since nearly half of US refining capacity is located on the Gulf Coast (PADD 3), and because many ports crucial for exporting refined products are located there, the energy market could be damaged at any time, resulting in higher prices for heating oil and gasoline (RBOB).

If a storm causes major damage or flooding to refined product facilities, forcing them offline for extended periods, this will lead to lower petroleum product inventories. However, if the forecasts turn out to be much more moderate than anticipated, the coming months could see refineries experiencing more depressed margins.

Image 4: US Days of Supply of Total Gasoline

Source: Kpler


Summary

The driving season in U.S. is one of the most important periods for the energy sector, especially for the US refining industry, when gasoline consumption, which represents a large part of refinery production, increases substantially in the country.

Rising gasoline inventories in recent months, despite higher demand in June and July, have caused crack margins to slump, indicating a bearish outlook (as reflected by days of supply).

However, this doesn't mean that things can't change in the coming weeks. The hurricane season in the United States could surprise and affect refined product production, resulting in increased gasoline and heating oil futures.

Image 5: Atlantic Hurricane Season Outlook for 2024 (Odds %)

Source: NOAA


Weekly Report — Energy

Written by Victor Arduin
victor.arduin@hedgepointglobal.com
Reviewed by Thais Italiani
thais.italiani@hedgepointglobal.com
www.hedgepointglobal.com

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