from Zero Hedge:
“A 6% fall in US demand would require a US recession. In the absence of a base effect, such a decline has only occurred in four periods since 1960 during which time PCE contracted. To achieve the 5.9% decline requires PCE to contract 6%, in other words, a recession.”
While energy traders remain focused on weekly changes in crude supply and demand, manifesting in shifts in inventory of which today’s API data, which showed the second biggest inventory build in history, was a breathtaking example of how OPEC’s “production cut” is clearly not working, a much more troubling datapoint was revealed by the Energy Information Administration last week when it reported implied gasoline demand.
To be sure, surging gasoline supply and inventories are hardly surprising or new: they remain a byproduct of the unprecedented global crude inventories leftover from two years of failed OPEC policy which resulted in a historic glut. Last January, overall crude runs were up 500,000 bpd as refiners shifted away from diesel and other products to gasoline to chase more attractive margins amid a mild winter and sluggish diesel demand. The move led to an overbuild of gasoline stocks that lingered into the summer, punishing margins when they should have been at their strongest. This January, crude runs are at historic levels, up by roughly 300,000 bpd over last year.
So yes, both gasoline stocks and supply remains at extremely high levels, but what set off alarm bells is not supply, but demand: the EIA last week reported that the 4-week average of gasoline supplied – or implied gasoline demand – in the United States was 8.2 million barrels per day, the lowest since February 2012. And, as Reuters adds, U.S. refiners are now facing the prospects of weakening gasoline demand for the first time in five years.
Unlike excess supply, which may have numerous factors, when it comes to a plunge in end product demand the implication can be
only one: the US consumer is very ill, especially when considering that gasoline use has grown every year since 2012, despite fears that demand has topped out amid the growth of fuel efficient cars, urbanization and a graying population.
Upon learning the data, the industry’s immediate concern was about refiners and what it means for already sagging margins: U.S. gasoline demand is closely watched by traders since it accounts for roughly 10 percent of global consumption. U.S. refiners amassed large inventories that punished margins last year, but record gasoline demand and robust exports helped provided a firewall against further slippage. Now the industry faces the prospects of higher crude prices following global production cuts and fresh federal data that suggests their gasoline demand safety net may be eroding.
“It’s tough to base conclusions solely on the weekly data, which can be off significantly,” said Mark Broadbent, a refinery analyst with Wood Mackenzie. “If the demand is low as it the data shows, then it’s a going to be real problem for refiners.”
But it could be a far bigger problem in what it means for the broader economy.
* * *
Enter Goldman which cuts right to the point: “A 6% fall in US demand would require a US recession”
As Goldman analyst Damien Courvalin notes, “implied demand data points to US gasoline demand in January declining 460 kb/d or 5.2% year-on-year. In the absence of a base effect, such a decline has only occurred in four periods since 1960 during which time PCE contracted.”
Goldman then adds that “to achieve the 5.9% decline suggested by the weekly data, our model requires PCE to contract 6%, in other words, a recession.”
So is the gasoline demand data accurate, and is a recession quietly gripping over the US, even as most other indicators are calmly flashing green?
Here Goldman refuses to believe the official data, instead reverting to its own model, which “adjusts” the data, to goalseek the decline to appear more manageable.
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