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.

Admit it: You love the smell of hot asphalt in the morning -- especially when a July Fourth weekend rolls around.

Even better, the cost of getting on the road has come down: Gasoline averages about $2.35 a gallon, 16 percent lower than it was heading into the last Independence Day, according to the Energy Information Administration.

Ignition
U.S. average gasoline prices heading into the July Fourth weekend are the cheapest in years
Source: Energy Information Administration

For those in the dealer community -- service stations, refiners and oil producers, working backwards up the chain -- this joy is actually a mixed blessing. Yes, cheap gas stokes demand, but it's also cheap, with all this implies for profits. Here's the average crack spread -- a rough measure of gross refining margins -- for wholesale gasoline versus the price of WTI crude oil in the month of June going back to 2011.

Short Summer
Average crack spread for gasoline versus WTI crude oil in June
Source: Bloomberg
Note: Data for 2016 are through mid-morning June 29th.

This year sticks in like a short thumb. Which is odd, when you consider just how much gasoline America appears to be guzzling. Here's the EIA's take on it:

Gasoline consumption is forecast to increase by 170,000 [barrels per day] (1.8%) to 9.33 million b/d in 2016, which would be the highest annual average gasoline consumption on record. The previous annual average high was 9.29 million b/d in 2007.

That's right: We're on track to surpass that crazy summer of 2007, before the mother of all recessions hit (the crack spread that June averaged $25.30 a barrel, despite crude costing almost $70).

Yet margins are lousy anyway, which suggests one thing: The glut of oil weighing on prices is proving slow to clear, despite the apparent boost to demand from those same low prices. 

In Wednesday's release of numbers for the week ending June 24, the EIA reported U.S. gasoline inventories had risen to 239 million barrels, "well above the upper limit of the average range."

To measure how high inventories really are, it's best to compare them to forward demand to see how many days of U.S. gas-guzzling they could cover if they had to. The chart below shows inventories versus average demand over the following 12 weeks. For readings since the week ending April 8, I've factored in the EIA's short-term projections of gasoline demand.

We've Got You Covered
Gasoline stocks relative to forward demand are the highest heading into July 4th in well over a decade
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Stocks versus 12-week forward demand as per EIA's weekly estimates. Incorporates EIA's short-term demand forecasts for readings beginning with April 8th, 2016.

At 25.1 days, current demand cover is the highest it's been at this time of year since 2001. And let's assume for a second the EIA is low-balling demand (just smell that asphalt). The current projection is for gasoline consumption in June through September to be about 90,000 barrels a day higher than during the same period in 2015 -- which was a strong year for the pumps anyway. Double that, adding another 90,000 barrels a day. Even then, current inventories are enough to cover 24.9 days of gasoline consumption, still almost 2 days higher than this time last year.

As each week goes by, this becomes more of a concern. Gasoline demand tends to hit its seasonal peak in the next couple of months; and, as I explained here, history suggests prices may have peaked for the year already. Unless low pump prices spur an extraordinary increase in demand, that glut is going to persist -- especially as it isn't confined to the U.S. Inventories at trading hubs in Europe and Singapore are also high relative to history; the same goes for India, despite surprisingly strong demand.

Filling Up The Hub
Source: Bloomberg
Note: Singapore data are for light distillates, which include gasoline. Northwest Europe data are for the Amsterdam-Rotterdam-Antwerp hub and are converted at 8.5 barrels per tonne.

Even China's tanks have been filling up, and that's despite an increase in net exports of gasoline from the country as its refiners flex their muscles and apparent domestic demand sagged in May.

Exit the Dragon
China's net exports of gasoline have jumped this year
Source: Bloomberg Intelligence
Note: Converted at 8.5 barrels per tonne.

For U.S. refiners, the implication is that the pressure on margins isn't likely to abate, especially with new capacity set to keep opening worldwide (that's the other oil glut I wrote about here). For the market as a whole, it shows just how important disruptions on the supply side have been to supporting crude oil prices in recent months. If conflict, along with driving, were to ease as summer fades, fall could come sooner than the market thinks.

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