Schork Oil Outlook: 2 Ways to Read Gasoline Demand
According to the FHWA, travel on all roads in March stands 2.3% higher year-on-year, rising 19.68% month-on-month to 254.79 billion miles. That seems like a huge percentage change, but much of it was seasonal. March sees an average month-on-month change of 16.39% over the 2004-08 timestep.
Regardless, it was a strong number, as demonstrated by the de-seasonalized chart in today’s issue of The Schork Report.
In quantitative terms, the number is certainly bullish. Considering that gasoline prices are 36% higher year-on-year, we would expect weaker miles travelled as consumers cut back on discretionary spending. Even taking into account the recovery in the economy, our model would place VMT in March closer to 247.44 billion miles or 16.22% higher than February.
Instead, the actual value exceeded our forecast by 2.98%. On the other hand, cumulative travel for 2010 is 0.7% lower year-on-year, but this is to be expected given the exceedingly harsh weather in January and February this year as compared to a mild winter in 2008/09. Given the gains in consumer confidence, we would expect the deficit in cumulative travel to transfer to a surplus by next month.
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As we have discussed in previous reports, weather was a large factor because rural and urban driving fell by the same amount. Urban driving accounts for business related, unavoidable driving whereas rural counts for road trips and discretionary driving. A larger drop in rural driving would imply that consumers were choosing not to drive while urban driving kept on pace, where-as an equal drop implies that roads were blocked or conditions were too harsh for driving by anyone.
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This trend appears to be continuing, while urban miles travelled in March grew by 7.2% month-on-month, rural driving grew by 10.61%. This is well above the 1.7% and 4.4% gains seen in 2009 by urban and rural miles travelled respectively.
This rebound could be due to a seasonal oddity in wholesale RBOB prices.
As illustrated in the chart in today’s report (request issue at The Schork Report), average retail gasoline prices rose in the month of March by an average of 7.18%. But in 2010 it rose just 3½%.
There are two interpretations of this effect on miles travelled: firstly, drivers expected that prices would soon increase in line with seasonal norms so they chose to take their driving holiday sooner rather than later — effectively front loading demand. This is not bullish.
The second interpretation is that drivers saw prices hold steady while their salaries rose and responded disproportionately well. This is bullish, especially given the recent drop in the retail average below $2.90.
If the latter holds, which we believe it does, the unfortunate consequence is that the best cure for low prices is low prices. Crude oil’s run towards 90.00 in April was likely due to strong perceived consumer demand. Now that prices are even lower, we fully expect drivers to increase their miles travelled. This is bullish for wholesale prices and may cause another run in the WTI contract towards and above 80.00.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.