Gasoline is an important fuel for transportation, and it requires refined crude for processing. Previously in this series, we discussed how a crude inventory build is bearish for crude prices. Likewise, an inventory draw would be bullish for crude prices. The same logic holds true for gasoline inventories and gasoline prices.
So, refinery inputs impact crude inventories, which in turn are determined by the demand for refined products like gasoline and distillates. Therefore, energy investors watch gasoline inventories closely. Gasoline inventories provide a handy snapshot of gasoline demand and supply trends.
Last week, gasoline inventories decreased by 0.2 million barrels to 239.9 MMbbls. Analysts’ expectations had pegged inventories to decline by 1.75 million barrels. The graph above shows that gasoline inventories are still outside the five-year range.
Factors that affected inventories
Gasoline production decreased from ~9.52 million barrels per day (Mmbpd) to ~9.16 Mmbpd last week. According to the EIA (US Energy Information Administration), the gasoline products supply averaged over 8.7 Mmbpd over the last four weeks. This was 2.8% higher compared to the corresponding period last year.
Gasoline demand decreased from ~8.63 Mmbpd to ~8.51 Mmbpd this week. Changes in production were more pronounced than changes in demand, which resulted in the inventory decline. Inventories were also likely impacted by net changes in exports.
Inventory movements affect refineries’ margins, like Valero Energy (VLO), Phillips 66 (PSX), Marathon Energy (MPC), and Tesoro (TSO). These companies are part of the Energy Select Sector SPDR ETF (XLE), an energy-focused ETF. All these companies make up ~10% of XLE.
Outlook for gasoline
Following falling crude prices and rising crude inventories, US weekly regular gasoline retail prices fell to an average of $2.04 per gallon on January 26, the lowest weekly price since April 6, 2009. However, as crude prices have risen comparatively, and following outages at West Coast refineries, gasoline prices have risen to $2.49 per gallon as of March 9.
The EIA’s latest Short Term Energy Outlook (or STEO) for March reported that US regular gasoline retail prices will average $2.39 per gallon in 2015 compared to 2014’s average of $3.36 per gallon. At these lower prices, gasoline consumption is slated to increase by 70,000 barrels per day, or a 0.8% increase over 2014’s consumption.
In the next part of this series, we’ll discuss the changes in distillate inventories last week.