America Revs Its Engines

We can’t credit the polar vortex any more.

During the last unusually cold winter, it was easy to write off heavy US fuel demand as a temporary, weather-driven phenomenon.

But here we are in June, and last week’s weekly petroleum report by the US Energy Information Administration showed a 5.4 percent increase in gasoline products supplied, year-over-year, for the four-week period ending May 23. (Products supplied is the EIA’s proxy measurement of fuel consumption.)

Distillates — a category that includes mostly diesel fuel this time of year — ran even hotter, demand increasing 8.6 percent year-over-year during the same four-week span.

Jet fuel did show a 1.6 percent year-over-year drop, limiting the overall increase in the presumed consumption of refined fuels to 2.2 percent.

The government numbers dovetail with those from the American Petroleum Institute industry group showing a 2.3 percent year-over-year increase in refined products deliveries in April.

That’s quite a blip, given the big and persistent drop in US fuel demand in the wake of the Great Recession.

 

Or maybe it’s more than a blip, because the trend dates back to last year, and was pronounced enough for the Financial Times to declare that “America returns to gas-guzzling oil demand” as far back in January.

The revival of demand is backed up by bullish industry data points, including increased freight demand, growth in truck registrations and a shortage of truck drivers. The Dow Jones Transportation Average has rallied more than 5 percent to record highs since the end of April, and nearly 30 percent over the last year.

And it’s not just business transportation that’s perked up. Hotel occupancy rates and bookings are up strongly in what’s shaping up as the best travel season since 2007, and possibly since 2000. The staycation era is mercifully receding in the rearview mirror.

But perhaps the best proof of increased demand can be found in the fuel market supply dynamics.  US gasoline production was up 9 percent year-over-year to hit a record high in April, according to the API, while distillate output jumped 12 percent for its best April ever.

Yet gasoline prices have rallied over the last six months.

Exports continue to aid the refining boom, rising 16 percent year-over-year and accounting for nearly 20 percent of the domestic fuel production, according to the API.

If improvement in US demand persists alongside the rising export tide, refiners already operating near maximum capacity could see a nice bump in margins.

The leading US Gulf Coast refiners have been big winners in The Energy Strategist portfolios, with Marathon Petroleum (NYSE: MPC) up 27 percent since our Oct. 24 upgrade to a Buy, and Valero Energy (NYSE: VLO) returning 43 percent since the Buy recommendation on the same day.

But other refining stocks we like have continued to lag, and could get a boost this summer if refinery turnarounds drive down the price of crude while the domestic shale supply keeps growing.

Ultimately, a permanent return to growth in US fuel consumption would serve as a big prop to oil prices, since the US still accounts for 20 percent of global crude demand.

But that outcome remains far from assured given continuing gains in fuel economy.