Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Just like you, oil traders can't stop thinking about the summer. While you dream of a week at a resort, though, they dwell on what you'll burn to get there: gasoline.

Gasoline has been leading the recent rally in crude. Oil prices rise when refiners process more of it, and they tend to do that when they make more money doing so. Right now, gasoline is where the money is:

In the Driving Seat
Refined product crack spreads over West Texas Intermediate crude oil
Source: Bloomberg
Note: Gasoline spread is for reformulated gasoline blend-stock for oxygen blending, or RBOB.

Pumps are busy. Weekly data from the Energy Information Administration indicate gasoline demand has averaged just under 9.1 million barrels a day so far this quarter, up about 330,000 a day, or 3.7 percent, from the same period last year. It is also about 2.2 percent above the EIA's forecast. That's a real break for the oil market.

The question is how long this support can hold when, even with this level of demand, the market is weighed down by high inventories of crude oil, gasoline and, after a mild winter, diesel.

Crude Comeback
Source: Bloomberg

Looking at numbers back to 1985, gasoline prices clearly follow a seasonal pattern. The next two charts show which months have seen the trough and the peak in gasoline prices in each of the past 31 years. One thing to note: prior to November 2005, the prices used are for New York Harbor regular gasoline futures. After that, they are futures for New York Harbor reformulated gasoline blend-stock for oxygen blending, the current benchmark known as RBOB. First, the troughs:

Cold Start
Since 1985, gasoline futures have tended to bottom out in the winter months
Source: Energy Information Administration, Bloomberg Gadfly analysis

And now the peaks:

Hot Wheels
The peak gasoline price season is wider than for the troughs, but skews toward spring and early summer.
Source: Energy Information Administration, Bloomberg Gadfly analysis

As you can see, January and December are when gasoline prices usually go into hibernation. The peaks are a bit more diffuse, but spring and early summer predominate: In more than half of the past 31 years, gasoline reached its highest point sometime between March and June.

Last year, gasoline peaked in June, playing a key role in the spring crude-oil rally, which ended that month.

RBOB the Builder
RBOB gasoline blending stock futures prices
Source: Energy Information Administration

For oil bulls, it is comforting that this year's low point was relatively late, in February, so the peak may turn out to be later in the summer again, just like it was in 2015. That would offer some support for crude through the next two or three months.

Can U.S. gasoline demand take on the Atlas-like burden of lifting the global oil market completely, though? It seems unlikely.

U.S. inventories of gasoline have been coming down, but are still almost 20 million barrels higher than the seasonal average for the past five years. Spread across the period from Memorial Day to Labor Day, that is a 201,000-barrel-a-day headwind right there.

Right now, the EIA estimates gasoline demand in the second quarter will average 9.38 million barrels a day. But let's say demand turns out to be 2.2 percent higher than projected -- as seems to have happened in the current quarter -- taking it to 9.59 million barrels a day. 

That shifts the needle, but only a little. The chart below shows historical gasoline stocks divided by average demand over the following 12 weeks, giving an idea of how much of a cushion the market has. For the numbers since Jan. 8, the forward demand data incorporate that higher, 9.59-million-barrels-a-day projection for the second quarter. Bulls need to see days of demand cover coming down, and they are -- just not by much.

Groundhog Days
While heading in the right direction for oil bulls, the days of forward demand cover provided by U.S. gasoline stocks haven't shifted by much
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Assumes average demand in 2Q 2016 of 9.59 million barrels a day.

As of March 18, the forward demand number was 25.6 days -- if you assume the EIA has underestimated second-quarter demand. If it hasn't, then there was enough gasoline to meet just over 26 days of driving, slightly higher than where we stood a year ago.

In what is an oil rally distinctly lacking conviction, gasoline offers some actual support. The bulls are just asking too much of it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net