Gasoline price have continue to decline placing the average retail price of gasoline at $2.09 per gallon according to the Department of Energy. Prices are poised to test the lows generated during 2008 in the midst of the U.S. financial crisis. The drop during that period was predicated on an erosion in demand driven by the eventual great recession. With crude prices hovering near 40 per barrel, the question for gasoline traders is how low can gasoline go?
Gasoline imports have been ratcheted back substantially according to the latest figures from the Energy Information Administration. The drop in imports is a function of pricing, but it has been made up by production in the U.S. The latest EIA figures show that the combination of production and imports are nearly unchanged from last year. Surprisingly, despite the drop in gasoline prices, there does not seem to be an increase in overall demand for gasoline.
According to the EIA, total products demand over the past four-week period averaged over 19.5 million barrels per day, down by 1.8% from the same period last year. This includes gasoline as well as distillates such as heating oil and jet fuel. Over the last four weeks, gasoline demand averaged over 9.1 million barrels per day, down by 0.2% from the same period last year. If demand does not pick up and production continues to accelerate prices will continue to make lows as we head out of the driving season. Over the next 6-months, gasoline demand will slow except for the period around the holidays where driving generally increases.
The spread between gasoline and crude oil continues to remain robust. Cracks are generating solid margins incenting refiners to increase production. This appears to be a function of crude supply, but higher gasoline inventories should eventually overwhelm product supply. When refiners begin to scale back, traders can then begin to look for a bottom in gasoline prices.
