May 23, 2020 | 5:00 am
By Barani Krishnan
With US crude finally back at $ 30 a barrel, joining its British counterpart Brent at that mark despite lingering ravages of the coronavirus, benchmark oil West Texas Intermediate will have its first stress test this weekend. —A four-day bridge that culminates in the celebration of Memorial Day in the United States.
Since it became an official federal holiday in 1971 to honor those who died serving in the United States Army, Memorial Day has become the marker of the beginning of summer, with family gatherings, barbeques, parades through the cities. and the first dip after winter in swimming pools and beaches across the country. Road trips are also widely popular, often with the largest number of Americans behind the wheel compared to any other time of the year.
Oil will experience less demand on this holiday
However, this year, all Memorial Day activity is expected to occur at a slower rate due to COVID-19 and continued recommendations for social distancing despite the reopening of much of the economy in all 50 states. from the United States.
Also missing is a super-important indicator that has helped guide the start of summer demand for summer oil in the United States: the annual pre-Memorial Day travel survey conducted by the American Automobile Association (AAA).
“For the first time in 20 years, the AAA will not issue a Memorial Day travel forecast due to the impact of COVID-19 on the underlying economic data used to create this forecast,” the association said Monday.
But while that might be the case, the AAA, which has been forecasting Memorial Day travel since 2000, did issue a forecast for 2020.
“With the guidelines for social distancing still in force, it is likely that the volume of travel on this bridge will record historic lows.”
Have oil prices driven demand?
That would not be surprising. While oil demand is in “recovery mode,” gains so far have barely made up for losses, regardless of the WTI’s more than 200% jump from the price lows three weeks ago.
According to AAA, some 43 million Americans hit the road last year for Memorial Day, the second-highest reading since 2005.
The lowest reading of this indicator was observed in 2009, with only about 31 million travelers, during the year of the Great Recession that began with the financial crisis of the previous year.
Without a doubt, the AAA estimate includes Americans who travel by plane and other forms of transportation such as trains and cruises. The bulk, however, remain the drivers.
For many who wonder if the WTI will justify its price above $ 30, the AAA’s Memorial Day forecast is far from being fulfilled. Their estimates have been an important indicator for the beginning of the summer demand for gasoline for years. This year, in particular, this reading will be very important.
Gasoline is the only component of oil whose demand increases
Why? With so many fuel products already available, the only one that has a chance to keep the oil rebound going is gasoline. Despite the fact that most of the 50 states of the United States have reactivated their economies, the activity of trucks has hardly rebounded; Public transportation remains underused as many people continue to work from home, and spurious flights have not taken off. In such circumstances, the only source of demand may come from driving.
Gasoline reserves have experienced the largest drop among all the energy sector reserves reported weekly by the United States Energy Information Administration, with a net decrease of around 5 million barrels in the five weeks until 8 of May, against forecasts of a net increase of more than 11 million.
Distillate stocks, which include diesel, have increased 18 million barrels in the three weeks through May 8.
The absence of 2020 Memorial Day AAA readings doesn’t mean the market has no idea what travel will be like this weekend.
The following dataset will be released on May 28, with the booking report for the current week. In that post, investors and traders will be able to re-learn the gasoline production anticipated by refiners, and how much drivers filled up their tanks by Friday before starting their road trip over the weekend.
The full impact of Memorial Day demand will be visible in the June 3 dataset of the Energy Information Administration that will collect data for the period from Saturday to Monday.
GasBuddy estimates this year’s summer travel will drop 44%
In addition to the administration data, we will know some percentage estimates of summer travel published by GasBuddy.com, which, like the AAA, tracks the prices of gasoline in the United States.
According to a survey of its users, GasBuddy predicts a 44% annual decrease in travel from Memorial Day to Labor Day, which falls on September 7.
“Of course, the big drop in travel this summer is due to COVID-19,” says GasBuddy on a blog.
“72% said the virus has directly impacted their summer travel plans: take fewer road trips than previously planned (48%), cancel trips that require flights (36%), and make shorter trips (24 %). ”
If there is a silver lining to the GasBuddy survey, it is that 31% of respondents have said they plan to take at least one summer road trip this year.
Low gasoline prices are playing an important role, as the national average is currently more than a dollar a gallon less than last year. In the case of those who plan to hit the road, 36% have said that low prices are an important factor in their decision, compared to just 6% who said the same the previous year and 5% in 2018.
The AAA agrees with the argument for low gasoline prices, stating that “the trend of prices at pumps facing downward pressure is likely to continue until the end of the winter driving season.”
Unemployment could continue to be a drag on oil recovery
But it could take more than low prices to fuel the history of gasoline consumption.
Art Berman, an analyst who has been following the energy market for almost four decades – he started out as an oil geologist – has said that the recovery in demand so far remains less by historical standards, with an increase still 4 million barrels daily, or 20%, below the five-year average for the first week in May.
“And that’s the problem with economic recovery,” writes Berman.
“Unemployment is probably 20% when the official 15% is adjusted to include those who are not looking for a job or who simply have not submitted an application for unemployment benefits. The economy may be officially revived, but the number of people losing their jobs is increasing. We are operating at an 80% economy and that may seem optimistic by the end of the year. “
Delving further into the oil rally, Berman then questioned why the market was celebrating WTI hitting $ 33 when data indicated that 35% of profits came from short hedging by traders abandoning bearish positions. profitable.
“The main reason to celebrate that the WTI is at $ 33 is that that price is almost three times higher than the average price of $ 11 for the second half of April,” said Berman, adding that the weighted average equilibrium price for Major US shale oil drillers such as Diamondback (NASDAQ: FANG), Concho (NYSE: CXO) and Pioneer (T: 6773) (NYSE: PXD) held at over $ 60 a barrel.
“Anyone who is excited about oil at $ 33 has to think about that.”
This note first appeared on Investing.com