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.

According to the gasoline market, we're in a recession.

You hadn't noticed? Hmm. Since late January, gasoline demand has been running about 5 or 6 percent lower, year over year, according to the Energy Information Administration's weekly estimates. Historically, that sort of drop has only happened when there's been a recession or a huge spike in prices:

This Just Doesn't Happen
Big dips in U.S. gasoline demand, especially of 5 percent or more, are almost unheard of outside of a recession or oil crisis
Source: Energy Information Administration
Note: Data show year-over-year change in trailing 12-month demand to smooth out seasonal swings.

Here we are, though, with oil stuck in the mid-$50s, unemployment below 5 percent and the IMF forecasting the economy to grow by 2.2 percent in 2017.

This doesn't sound like a recession. Which means those weekly gasoline numbers are probably too pessimistic. The chart above uses the more reliable, revised monthly data (which is why it ends in November 2016). The EIA's weekly figure for gasoline demand is actually a residual rather than a firm estimate; revisions to export and import data, which are always lagging, have a tendency to lead to big revisions in gasoline demand (see this for a detailed take on how these data interact).

Even if the rest of us can breathe easier, though, that doesn't mean refiners can.

One figure that can't be disputed is this: 23.6 million barrels. That's how much excess gasoline had flowed into storage tanks this year as of February 10. The average for the same period in the previous five years is just under 10 million barrels, and that average is skewed higher by a similarly large build-up in early 2016.

Even without a recession, gasoline demand is showing distinct signs of stalling out. The latest figures on how far Americans are driving, released this week by the Federal Highway Administration, show the boost delivered by the crash in pump prices is starting to wear off. You can see that boost here:

Pumped
The collapse in oil prices accelerated the recovery in U.S. vehicle-miles traveled after the financial crisis
Source: Bloomberg
Note: Trailing 12-month totals.

What is less clear is that the pace of recovery is slowing sharply. Vehicle-miles traveled increased by just 0.5 percent, year over year, in December. For much of the prior two years, roughly coinciding with the crash in oil prices, growth had averaged more than 3 percent, sometimes spiking above 5 percent.

In addition, the slowdown is fairly broad in geographic terms. Of the five regions into which the Federal Highway Administration divides the U.S., three showed outright year-over-year declines in December, the first time that's happened since March 2014. Those three regions represent almost 60 percent of the entire country's vehicle-miles traveled; again, it's the first time that much of country has experienced a decline in about three years:

Off The Pedal
Drivers everywhere revved up in 2015 amid the initial plunge in gasoline prices but the novelty appears to be wearing off
Source: Bloomberg, Bloomberg Gadfly analysis
Note: Percentages represent the share of total vehicle-miles traveled accounted for by regions experiencing declines.

The jumps in miles driven and gasoline demand in 2015 and 2016 make for tough comparisons, growth-wise. But other forces are at work, too.

Structurally, the number of miles driven by the average American peaked more than a decade ago (see this blog post by Harry Benham of Carbury Consulting). Tailwinds partly reversing that trend in recent years are now tapering off. Unemployment, for example, fell by almost a full percentage point in the past two years. With unemployment now at 4.8 percent, though, further declines get harder to come by.

As for pump prices, today's average of about $2.22 per gallon is far below the levels of $3.60 or more paid back in the summer of 2014. But the rebound over the past year, highly visible on gas-station placards along every highway, must have registered with at least some drivers:

Traveling The Wrong Way
Gasoline prices are still far below their pre-crash peak, but are up sharply over the past year
Source: Energy Information Administration

That price chart is one reason why OPEC's reversion to a policy of supply cuts carries the seeds of its downfall.

As for U.S. refiners, faced with a glut of gasoline and higher costs for crude oil, they face another difficult year of pulling every lever they can to protect their margins. Reporting quarterly results last week, the chief executive of PBF Energy Inc. noted that the refiner had, unusually, recently been exporting gasoline from its core East Coast region.

The biggest, bluntest tool at refiners' disposal, though, is simply cutting production. Based on guidance given by the five largest independent refiners, Barclays estimates the amount of crude oil they process this quarter might drop by 5 percent, year over year.  If repeated across the entire sector, that would be an even bigger decline than the 4 percent drop back in the dark days at the start of 2009. That sounds like a recession for someone, at least.

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

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

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