Holiday Season Consumer Behavior Helps Stall COVID-19 Fuel Demand Cycle
In our early November blog, we discussed the COVID-19 demand cycle for refined fuels and how important it was for the global crude market to see a simultaneous demand recovery in the light, middle, and heavy ends of the refined barrel. Although the news on the COVID-19 vaccine development is overwhelmingly positive and is supporting crude futures by providing optimism that we will soon see growth in demand for oil products across the refined barrel and therefore normalizing refinery runs, we are not there yet. Our proprietary Refined Fuels Demand data reveals that the weakness in gasoline demand is accelerating. And although diesel demand has staged a strong recovery, with the shipping demand peak nearing for Christmas packages and COVID-19 still set to weigh on economic activity moving through the first quarter of 2021, this lone bright spot for U.S. refiners is at risk.
Amid the initial U.S. outbreak of COVID-19 and government lockdowns in March, diesel demand and refining margins held up while demand and margins for gasoline plummeted. As we moved through the spring, the tables turned as the global economic contraction caused diesel demand to plummet while passenger vehicle driving activity recovered from the initial lockdowns, pushing demand and refining cracks for gasoline higher. But as we moved through the summer and fall, it was clear that demand for diesel was once again pushing higher as gasoline demand was slowing faster than seasonal norms.
With this cycle of rising social and economic activity leading initially to stronger gasoline demand, followed by stronger diesel demand ultimately begetting the next wave of COVID-19 cases and the next downturn in activity, gasoline and diesel demand seemed stuck in this cycle without the intervention of a vaccine. This is what I termed the COVID-19 demand cycle for refined products. As noted in early November, the downturn in gasoline demand in the United States, much like in Europe, was already beginning as case counts and hospitalizations were on the rise. The question moving into November was if diesel demand would ultimately follow gasoline lower, completing the aforementioned cycle.
Diesel demand has staged a solid recovery throughout the second half of 2020, despite lingering macroeconomic weakness and mass unemployment. Diesel’s initial demand recovery followed from the need to restock consumer and industrial goods inventories after the severe disruption of supply chains in the first half of the year. The rebound in diesel demand has been seen in rail traffic, as well as ocean-bound and over-the-road freight through November.
With the holiday shopping season upon us, resilience in diesel demand increasingly reflects behavioral changes by consumers brought about by COVID-19. U.S. e-commerce sales jumped 44.4% year-on-year in the second quarter and were up 37.1% year-on-year in the third quarter. E-commerce sales surged from an already record-high of 11.8% of total U.S. retail sales in the first quarter to 16.1% of total retail sales in the second quarter and 14.3% of total retail sales in the third quarter. Data from the Black Friday holiday shopping period point to this trend of avoiding brick and mortar storefronts in favor of online purchases is holding strong. Reports indicate in-person shopping at stores dropped by roughly 50% from last year, while online spending jumped 22% from year-ago levels.
Surging online sales have helped stall the completion of the COVID-19 demand cycle that I described previously, wherein diesel demand follows gasoline demand lower on a lag as economic activity slows. Although economic growth and growth in consumer spending is slowing once more, delivery of a growing share of consumer purchases to homes has supported diesel demand through November. In addition, with more targeted approaches to managing the virus, manufacturers and shippers have avoided the spiraling shutdowns that led to supply chain breakdowns and plummeting diesel demand earlier in the year.
What DTN data shows
Based on real-time Refined Fuels Demand data, on a seven-day moving average basis, U.S. diesel demand peaked in October when it was briefly seen above year-ago levels. For November, DTN data shows U.S. diesel demand just 3% below year-ago levels but down 7.6% from October’s pace. Diesel demand always drops sharply during the Thanksgiving holiday as companies and truckers shut down operations. But comparing diesel demand for the 10-day period surrounding the Thanksgiving holiday (from the Saturday before to the Monday following) to year-ago levels continues to speak to the resilience in diesel demand. Over the November 21 to November 30 period, DTN data shows U.S. diesel demand just 0.3% below year-ago levels.
Just as diesel benefited from the shop-at-home trend, gasoline has faced a decline in commuting to work and shopping as another wave of COVID-19 cases and hospitalizations have hit. DTN data shows that the gasoline demand recovery stalled out in June, and demand weakness is now accelerating once more. Based on our proprietary data, gasoline demand fell 6% from October’s pace in November and averaged 12.2% below year-ago levels for the month.
Over the November 21 to November 30 period, which captures travel to and from Thanksgiving gatherings, DTN data shows U.S. gasoline demand 12% below year-ago levels. The relative year-on-year weakness is accelerating as we enter December. Based on the seven-day moving average, gasoline demand is trending lower and is now down 14% from year-ago levels in the early days of December. The last time gasoline demand was weaker than this on a year-on-year basis was back in early June when the economy was still reeling from the initial COVID-19 lockdowns.
This breakdown between gasoline and diesel demand recovery trajectories is evident in recent trends in refined product crack spreads. While the Brent based RBOB crack has weakened 23% from month-ago levels to $4.28 bbl, the ULSD crack is up 26% from this time last month at $9.64 bbl.
A massive cyclical global financial repositioning is taking place in light of vaccine distribution plans. There is no denying it. And oil futures understandably get bid up amid this repositioning toward greater risk. The macro risk-on trade and optimism for economic growth outside of the United States is leading investors to pile into emerging markets and flee the U.S. dollar, further supporting oil and commodity futures more broadly.
Although with the coming vaccines we have a real reason to be optimistic for spring and summer 2021 crude and product demand, the December through March period remains perilous for physical markets. There remains a real risk that the peak of holiday shipping marks the top for diesel demand for the next three months. If we do not see the usual seasonal first-quarter rise in diesel demand due to the U.S. economy slipping back into contraction, the diesel crack, and with it, the broader refining margin is at risk. It’s hard to see how unseasonably large builds in refined product stocks are avoided if U.S. refinery runs rise 1.5 million bpd from current levels in December as the Energy Information Administration projects. As it stands, even with refinery runs 2.8 million bpd below year-ago levels, gasoline stocks are already building, and distillate stocks are teetering on builds.
Over the next few months, physical crude and product markets will be increasingly important to watch as they are where the rubber meets the road for the current supply and demand balance. While crude forward curves are telling us that there is a growing concern about crude oil supply rather than demand moving through 2021 following the vaccine announcements, it’s important to consider that the crude futures market often gets ahead of the reality on the ground or looks through short-term risk. Sometimes this speculation and willingness to look through risk pay off, sometimes not.
Our real-time refined product demand data is showing that months of economic devastation and the latest wave of COVID-19 are causing the weakness in gasoline demand to accelerate as we enter December. While the resilience in diesel demand has been impressive through November, the end of holiday package delivery in December and the potential for economic contraction in the first quarter is a real threat to this resilience. As such, we will be keeping you updated on the trajectory of U.S. refined fuels demand using our real-time data in the weeks to come.