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Commodities 2022: US gasoline demand trend looks stronger into 2022 despite pandemic undertones

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Commodities 2022: US gasoline demand trend looks stronger into 2022 despite pandemic undertones

Highlights

Driving patterns shift but gasoline demands remain strong

US refiners optimize for gasoline over distillates, sources

2022 inventories remain a concern on low production rates, sources

US gasoline demand is likely to stay strong well into 2022 despite the emergence of the omicron variant of coronavirus, expects traders and brokers.

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Since the week ended Sept. 10, 2021, the implicit demand, measured as product supplied, was at an average 276,000 b/d above the last five years average, weekly Energy Information Administration data showed.

"Demand for the holidays is up," one Gulf Coast trader said in December. "And I hate to say it, but I don't see any price relief anytime soon."

As many countries, including the US, implemented temporary travel restrictions for South African countries to slow the spread of omicron, President Biden said that the US would not resort to lockdowns or shutdowns to mitigate the virus, but rather stay vaccine focused.

With that backdrop, market sources say omicron is not a major concern regarding the overall health of gasoline demand in 2022. As a Midwest trader put it: It would "take a pretty big scare" for the omicron variant to affect gasoline markets.

Travel and driving patterns remain far from normal, but offsetting changes may have minimized the net effect.

The INRIX 2021 Global Traffic Scorecard reported US traffic congestion increased by 10 hours year-on-year, which likely contributed to the increase in gasoline demand, but remained 63 hours below the 99 hours reported in 2019. "In general, downtown travel continues to trail pre-pandemic levels. Trips to downtowns in the US are down 22% from pre-pandemic levels," according to the report. "Shifting travel patterns resulting from working from home, cycling and transit usage continued throughout 2021 – leading many experts to believe such trends will extend beyond post-pandemic."

But the shift has brought increased community travel. Google mobility data showed US mobility 6% above baseline for residential mobility, where gas mileage tends to be less efficient due to stop-and-go traffic or idling while waiting.

Building inventories

Sources pointed to strong market backwardation as a concern for building inventories for the upcoming year, a trend already seen for the greater part of 2021.

Despite seeing strong import levels into the US East Coast throughout the summer, those levels fell in October as strong European domestic demand, high naphtha prices, and US market backwardation disincentivized European cargoes from making the voyage across the Atlantic.

In response to the high feedstock and gas prices, European refiners cut rates, and there is a question of whether they will need to reduce gasoline production further.

Sources say that if production rates in Europe continue to decrease, it could make it challenging to build inventories in the spring, and more importantly, the summer, as the Atlantic Coast is an import market that relies heavily on European exports.

In the US, refineries continue to optimize for gasoline as they try to strike a balance between supplying the gasoline market and oversupplying the distillate markets.

"Margins are not bad for US refiners," an East Coast market source said. "US refiners are geared to produce more gasoline, so how all the systems in the refinery work is that it's better for refiners to run max gasoline now as jet (fuel) demand has not fully recovered."

Even at max gasoline, US production may not return to normal due to restrained capacity. In 2020, six US refineries with a combined capacity of 556,000 b/d closed or could be converted to terminals or biodiesel refineries. Most of 2021 also saw supply playing catch-up with demand. A deep freeze, flooding, hurricanes and even a ransomware attack on a large products pipeline hampered refinery run rates until the end of the year.

Market impact

Gasoline prices across the US have reflected the strong demand seen in 2021, and soared to multiyear highs through the fall due to strength in the underlying crude futures contracts and as life slowly returned to normal following a year of lockdowns.

As a result, the Gulf Coast CBOB reached $2.4251/gal Nov. 2, the highest level since Dec. 19, 2011, when it was at $2.427/gal.

The demand for plastics and disposable material rose because of the COVID-19 pandemic, adding support to the price of the feedstocks for plastics production such as naphtha, butane, propane, ethane. These light ends in general are also gasoline components, and the gasoline pool had to compete with the petrochemical industry for the same components.

The drivers of this price increase have been higher demand and limited supply resulting in a quicker recovery than expected for gasoline.

For gasoline, US drivers faced the highest Thanksgiving gasoline prices in nine years and the trend looked to continue for busy Christmas and New Year's holidays.

There are definitely new norms for commodity markets in this pandemic, from shifting driving patterns to new supply shortages. But one thing rings clear in 2022: Americans are starting to drive like old times again.