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QuickHit: Permanent demand destruction in fuels markets

Patrick De Haan, Head of Petroleum Analysis at GasBuddy, joins us for this week’s QuickHit episode where he discusses the loss of demand in gasoline (petrol) and fuels markets in the wake of Covid-19. How much gasoline demand has been lost and when will it recover? How far have prices fallen – and how long will they remain low? Patrick explains the dark clouds that have formed around petroleum and when we’ll get back to a “sense of normal.”

 

GasBuddy helps motorists save at the pump by showing low gas prices across North America and down under in Australia. Patrick has been with GasBuddy for over a decade basically helping millions of users understand what goes into what they’re paying at the pump and to understand how complex issues can influence their annual fuel bill.

Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Patrick on Twitter: https://twitter.com/GasBuddyGuy

Check out the CI Futures platform to forecast currencies, commodities, and equity indices: https://www.completeintel.com/ci-futures/

 

***This QuickHit episode was recorded on September 16, 2020.

Last week’s QuickHit was with TankerTrackers.com co-founder Samir Madani explaining half a billion barrels of oil going to China right now.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes:

 

TN: I was following you particularly in the last couple of weeks going into the U.S. Labor Day weekend in early September and then coming out of it. It seemed to me that consumption going into Labor Day seems pretty strong but coming out of it seemed like things really fell off even on an annualized basis. Can you talk us through what is that telling you if anything meaningful and is that telling you anything about the recovery from COVID, the consumption recovery?

 

 

PD: We’re just entering this post-summer time of year. That we really get a good idea of where we’re going and obviously, COVID19 has really influenced every angle of what’s normal for this time of year.

 

 

What’s normal is that demand for gasoline typically drops off notably. Kids are back in school. Vacations are done. Americans are staying closer to home. But this year, a lot of what we’re seeing in the media, the current events headlines are playing into how Americans are feeling and that plays into where they go. How often they do and so all of this is really factored in and probably one of the top economic indicators of what to expect.

 

 

And so far in the week after Labor Day, we did see a nice run up to Labor Day. I think it was probably one of the best summer holidays, which gave us some glimmer of optimism. But now, we’re coming down from the sugar crash and we are starting to see demand fall off. Where we go from here? I think, we’re at a turning point. Will we see demand continue to kind of plunge or will we start to see a little bit more optimism? I think obviously a vaccine would be the holy grail. But for now, really we’re kind of looking at seasonal trends that may be enhanced by a lot of the restrictions motorists are contending with state by state.

 

 

TN: Next to my office is a commuter lot, and that commuter lot has been closed. We’re outside of Houston. So, people get on a bus to go into downtown Houston for work. That’s been closed since February. Yesterday, I noticed they’re mowing the lawn. They’re getting it ready to reopen. How much of an impact are those commuters, who are driving, who would normally use bus into a downtown? Is that having an impact on the consumption and on the demand or is it pretty marginal at this point?

 

 

PD: At this point, we’ve seen a lot of demand come back. We were at one point down 55% in March or April and basically everyone stayed home. Now we have rebounded. We’re still down about 15 to 20% compared to last year. But it’s that last 15% percent that’s probably going to take more than a year, maybe, two years to fully come back as businesses slowly reopen. That’s a really good benchmark of how quickly that last 15 percent in demand is going to take and I think at this case, it’s going to take quite a long time for people to be comfortable getting on mass transit.

 

 

I have the same thing here in Chicago. I was recently down in Northwest Indiana. There’s a lot of commuters that come up from Indiana during the day. And again a massive parking lot satellite imagery shows that parking lot filled for the last 10 years consistently, suddenly it’s empty. Some of the big businesses, they’re not really talking about getting a lot of people back into the offices by the end of the year. All the focus really is going to be on early next year or if there’s a major disruption like a vaccine that would cause businesses to move their timelines up. But for now, when it comes to gasoline, distillates even jet fuel, it looks rather bleak.

 

 

TN: Yeah, I think so and I think we’re getting to that point of the year. Even if there was a vaccine tomorrow, I don’t know if people would necessarily call everyone back before the end of the year. It just seems like we’re getting into a really awkward time where it’s hard to tell people to come back. Is that the sense you get as well? I mean JP Morgan aside, right? You know, they’ve called everyone back on September 21st but do you see, are you seeing much activity around other people heading back into the office?

 

 

PD: Not a whole lot. It’s really interesting actually. I was talking to my wife this morning, who does investment bacon and she said that some of the JP Morgan traders had been called back earlier only to be now sent back home because of a coronavirus in the office. That’s kind of the risk that businesses are taking here. That’s why it’s going to take a while for us to get that confidence back to go in offices.

 

 

Now even more so than ever, businesses are becoming accustomed to this new era and telecommuting is likely to really surge. That could mean a permanent demand destruction of at least 5% maybe even more than that. Maybe we don’t get 10% of demand back and it takes years for us to start building up our confidence to get back on planes, to get back on trains and that’s where the dark clouds are forming for petroleum is that the longer we remain in this era, the longer it’s going to take us to get that confidence back to go back to some sort of sense of normal.

 

 

TN: Since you focus on gas prices, petrol prices. What does that do if we don’t recover that 10% in commuter consumption or driver consumption? Putting even the jet fuel stuff aside. What does that do for overall gasoline pricing in the U.S.? Are we at a kind of a step lower than we’ve normally been or do we still see say intermittent seasonal volatility where we go up to normal prices? What does that look like for the average consumer?

 

 

PD: I think it was back in 2015 at some point when OPEC opened the Spigot up and oil prices were low. We all had this phrase “it was lower for longer.” That’s a phrase that may be in a different use here but that’s what we may be looking at for both gasoline and distillate prices lower for longer because of this very slow return of demand. And so I foresee that gasoline prices will struggle for quite some time. Maybe, a period of years to get kind of back into where they normally would go and it’s because of this demand destruction that could stick around. I think most of this winter motorists will be looking at prices under $2 a gallon. Of course barring the traditional high-taxed, high-priced states like California and Hawaii where the sun is shining and unfortunately right now they have a lot of forest fires but for everyone else it’s going to be a sub $2 gallon winter. Next summer is probably going to be another good one. But the future next summer does get a little murky if we do get some demand back. Keep in mind that we’re making a lot of permanent decisions today on the era wherein that is oil production has been shut down, drilling is offline, even some refineries in Europe are shutting down. And if we do get some sort of bounce, that could lead these shutdowns today, could lead to higher prices whenever we do turn that corner.

 

 

TN: Just for context when you say sub $2 a gallon? How much is that off of normal prices? What are normal prices? Is it 2.53 dollars?

 

 

PD: It typically is in the last few years we’ve held remarkably stable somewhere in the mid to upper two dollar gallon range nationally. So, very, very rarely with the exception of I believe early 2016 and early 2015 have we seen the national average spend a considerable amount of time under two dollars.

 

 

TN: So you’re saying 30% off of what had been traditionally normal prices? Is that fair to say for the next maybe 12 months or something?

 

 

PD: Yeah, I think six to 12 months and potentially beyond that and the amazing thing about those prices is before this, that would entice motors to hit the road. Now, it’s not really doing a whole lot.

 

 

TN: If gasoline prices are 30% off of normal but commuting is down these sorts of things. Is there an upside? What are you telling your clients about this?

 

 

PD: The upside here potentially and my clients at GasBuddy members so we’re looking at this a little bit differently. Is that low prices probably here to stick around? I think given the situation, low prices will actually keep America using more petroleum than the early era 2014, 2013 when motorists were really looking at Prius’s, EVs. I think that’s going to really slow down given the environment of low prices kind of incentivizing motorists not to ditch their fossil fuel cars at this point.

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QuickHit Visual (Videos)

QuickHit: “LUV in the Time of COVID”

Avalon Advisor’s chief economist and author of “After Normal: Making Sense of the Global Economy”, Sam Rines joins Tony Nash for the 14th episode of QuickHit, where we discussed the L, U, and V recoveries in different states and industries. He also shares some interesting data on traffic congestion, CPIs, car sales, and food prices — and what these data mean for investors, businesses, and people. And what trend is he seeing to pop back up in travel and leisure?

 

Don’t miss out some of our relevant QuickHit episodes:

Proactive companies use data to COVID-proof their supply chains

Manufacturers are bouncing back, but…

We’re not going to normalize

How do we use up all the corn now?

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

TN: I’m trying to figure out when and how do we come out of this? We have our models, we have our views on things. But I read your stuff every day and what are you thinking? Where are we right now? Are we early, mid, late? Where are we now and where do you think will go in the next few weeks or months?

 

SR: So I think the answer is all three. We call it LUV in the Time of COVID. There will be an L-shaped recovery, a U-shaped recovery, and a V-shaped recovery depending on whether you look at Texas or Florida or Kentucky. Whether its manufacturing or services. Everything has its own shape. So we’re early on some, middle on some, and late on others.

 

On the overall employment side, we’re probably past peak pain. At this point, you’re mostly having unemployment benefits a hindrance to bringing people back to work, not help people keep afloat. That’s not true everywhere. Certainly, there are places that are still shut down and those people still need those unemployment benefits. But places like Texas that are reopening to a certain degree like Florida and Georgia. It’s difficult to bring people back to jobs that pay less than the enhanced unemployment benefits.

 

One interesting piece of the puzzle though is the continuing unemployment claims and you’ve begun to see the states that open actually begin to roll those down. So people are coming off those unemployment slowly. It’s not happening quickly. Florida is one of the exceptions that Florida came off extremely fast. I think that’s going to be one of the stories that’ll pick up pace over the next three to four weeks. There’s a decent chance that if we’ll continue to have these types of numbers for continuing claims. There’s a decent chance that the May unemployment number will be the worst number we see this year. You begin to improve pretty quickly. The June number, we don’t take that survey for another few weeks. That’s more than likely going to be better than May in terms of unemployment beginning to come down. So we think it’s a mixed bag. But employments probably going to improve from here.

TN: That’s good news, I hope. There are a lot of service jobs and blue-collar jobs that were laid off in the first waves. Is that right?

SR: Yeah most of them. The interesting thing is it’s fairly easy to social distance within most manufacturing facilities. So manufacturing, theoretically, can snap back a little bit faster than the services side of the economy. The services industry is going to be the laggard here. But the service industry is also the majority employer, far more important on the employment side of manufacturing.

TN: You keep an eye on things like traffic patterns and restaurant usage. What are you seeing as the rate at coming back and then what does that say about things like food prices or gasoline consumption?

 

SR: It’s snapping back very quickly on the driving side of things. That’s snapping back much faster than public transit, airlines, etc. You have the U for airlines and mass transit. But you have what appears to be a pretty sharp V in driving. Congestion is almost back to normal levels in places like Houston during rush hour. Texas generally is back towards its baseline according to most of the metrics.

 

The RV sales are through the roof. People still want to go on vacation. And if you can’t and don’t want to get on a plane and go to Cabo, you get in an RV and go to the Grand Canyon. It’s just another way to get out of the house. I got to a little bit of trouble for saying it. But I’ll say it again, if you keep boomers off of cruise ships, they’ll find a way to still go places and still have fun in retirement. They’re not just gonna stay up. They’re not just going to stay cooped up in their house. And the interesting thing about that is an RV is not a small investment for most people. So I think that travel might have more legs than people are really giving credit for. Camping might actually make a come back here versus your more crowded areas, particularly within that boomer crowd.

 

TN: Back to the 70s for camping. We hear about food shortages with meat and we also hear about storage for crude oil. With more activity, are you seeing faster drawdown with crude oil? Are you seeing anything happening there in terms of food?

 

SR: So with crude, we’re beginning to see drawdowns and I’m not sure that it’s faster than we anticipated. But gasoline particularly has picked up much faster than people anticipated. That drawdown will be much faster, much stronger and have longer legs than was anticipated. On the overall demand side for oil, it’s a harder picture to paint. Aviation fuel is a significant driver on the margin of usage within the US. A lack of that is offsetting any bullishness on the gasoline side. Those will probably balance each other out for the most part as we move forward and you have a drawdown that’s relatively in line with what we were anticipating a few months ago.

 

On the food side, you’ve seen a snapback in restaurants for Texas in particular. We are back to, give or take 55 percent usage for restaurants. We have 50% occupancy allowed in Texas. That appears to be pretty close to maxed out. At least restaurants, we get reservations. We’ve seen some interesting things on the eat-at-home food side. We dug through the CPI, the inflation data pretty carefully and found that the food at home was getting increasingly expensive in a way that we hadn’t seen in a long time. Eggs were getting expensive. Meat was getting expensive. Fresh fruits and vegetables are getting expensive and they were accelerating at a pretty rapid pace.

 

It does look like we’re going to have some pretty good crops. It doesn’t look like we’re going to have trouble on that front. So we shouldn’t have the pricing pressure emanating from that side, which is good.

 

The critical aspect is going to be how do we get the beef demand back up to the point where you actually have cattle ranchers wanting to not cull their herds and therefore drive state prices higher. I think that’s going to take more states opening restaurants like New York, California, and other big steak consuming areas of the country reopening and really beginning to drive that incremental demand.

 

Another fun note is I grew up in New Hampshire. Lobster is an important part of eating there. And lobster prices plummeted to the point where lobstermen decided they probably shouldn’t even go out and they were selling for two to four dollars a pound on the side of the road.

 

TN: Let’s just take a minute and we’re sitting in October 1st. We’ve gone through Q2. It was carnage. We’ve gone through Q3 and we’re looking back on Q3 versus Q2. What are you thinking at that point, October 1st of this year? Help me understand a little bit of that based on your perspective today.

 

SR: Based on my perspective today, I’ll probably be sitting in Boston, hopefully having a client meeting at a lobster that’s more expensive than three bucks, looking back and wondering how we missed the pickup that was happening in June and July and how the pockets of things that were doing much better than anticipated.

 

It’s worth noting according to one of the data sources I used, auto sales are actually picking back up rapidly from down, north of 60% for new cars and used cars. New autos only down, I’d call it the high 20% range from a year ago. Used cars down single digits from a year ago, on a volume basis. That kind of snapback in different pockets of the economy is going to be what I’m looking back and wondering how I missed whatever it might be whether it was people wanting to get back on cruises. I don’t think they’re going to want to give back on cruises. I don’t think people are gonna jump back on planes very quickly.

 

I think we have a 911 type of recovery. Three years, give or take there. I think that’s the mindset to use. But there will be something that just completely catches me off guard in terms of the speed and rapidity that it comes back, or with the L-shaped, it’s just never coming back. One thing I think we’ll catch a lot of people off-guard is the pivot on the margin from hotels to homes. Renting at home instead of renting a hotel. Being spaced away from people, having the pool to yourself. I think there will be trends like that that have become pretty clear whether or not they have legs by October and I think that’s probably one of them.