Sunday, March 25, 2012

Signs of demand destruction: the US consumer is saying NO to high gasoline prices

The NYMEX gasoline futures price hit another recent high last week and is sure to push up gasoline prices at the pump. This development will add to the lingering concerns about the nascent US consumer recovery.

NYMEX gasoline nearby contract (Bloomberg)

Crack spreads (spread between distillates and crude oil price) have recovered from the lows of December. It means that refinery margins are now quite high, with refineries enjoying fat profits once again. As an example Valero Energy (VLO), a major US refiner is up 27.6% year to date on a total return basis.

WTI 321 crack spread 1m

But it seems there is only so far the US consumer can be pushed before demand declines and possibly demand destruction sets in. As prices have risen over time, US gasoline demand visibly came off. US drivers are just buying less of it these days.

Source: Barclays Capital

And that trend is starting to be reflected in the levels of gasoline inventories. According to the latest EIA data, US gasoline inventories are materially above the 5-year range for this time of the year. Given the warm US winter, this can not be blamed on the weather.

Source: JPMorgan

With recent spikes in gasoline prices, the consumer has been able to adjust the driving patterns as well invest in more fuel efficient vehicles.
NEW ENGLAND CABLE NEWS: MasterCard SpendingPulse says gasoline consumption across the United States has been on the decline every week for the past year, showing a total drop of 4.2 million gallons. That's a 3 percent decline.

Higher gas prices seem to be the main factor. AAA puts the average price of a gallon at $3.89 today. That's the highest ever for this time of year, and analysts say it could reach $4.25 by the end of April. That's prompting Americans to make fewer daily trips and staying closer to home when they take vacations.

But the man who oversees MasterCard SpendingPulse's weekly consumption report says that's not the only factor. John Gamel points to rising sales of fuel-efficient vehicles.

A recent survey by J.D. Power and Associates found new-vehicle owners rated good gas mileage higher than reliability, stylishness or a great deal in their car buying decisions.
This pattern, if continues, will cap crack spreads and limit profits for companies such as Valero (might be time to take profits). But as a whole, the concept of gasoline being an "inelastic" commodity in the US is starting to change. The consumer is now able to dial down the demand (only partially of course) when prices rise too far. In the long run the introduction of Compressed Natural Gas (CNG) as an alternative fuel for US transport, (initially as a diesel substitute for trucks) will create competition for US refiners.

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