Holiday road: Foot off the gas

Author Sean Cronin

A resurgence of Covid-19 in many main markets is putting the brakes on the summer travel season, with effects on more than just gasoline demand.

In the 1983 film National Lampoon’s Vacation, Chevy Chase cheerfully packs his family into their car for a cross-country, summer holiday trip to the Walley World amusement park. The drive descends into a 2,500-mile long nightmare of family crises, extortionate mechanics and bizarre detours before the family finally arrives at the park. Which is, of course, closed for maintenance.

The movie may be instructive when surveying the wreckage of the US summer driving season, typically a mainstay of the country’s 9mn b/d gasoline market. It is a large part of why global oil demand typically rises by 1mn b/d in the third quarter, compared with April-June.

But not this year. The oil industry has never witnessed a demand collapse as under the lockdown measures introduced to contain the spread of Covid-19. At its peak in April, global oil demand was nearly 22mn b/d lower than at the same point in 2019. The US gasoline market accounted for over 15pc of this demand contraction. The latest estimates for the second quarter put the year-on-year decline at 15mn-18mn b/d.

Oil firms had until recently been pinning their hopes on demand recovering in the third quarter as governments eased lockdown measures and people embarked on holidays, whether in planes, trains or automobiles. But these hopes are being dashed by a resurgence of Covid-19 in many of the main markets — including, notably, the US. It is depressing economic activity and summer holiday driving, even with commuting workers avoiding public transport and turning to cars.

Mobility data released by Apple and Google point to higher levels of transport use in most markets. The data are indexed against a January baseline, but there are drawbacks to relying on them as a proxy for oil demand. Mobility indexes more closely matched the pattern of demand fluctuations earlier this year. But they are now diverging somewhat, the further they get from the January baseline. US driving direction enquiries to the Apple Map application, for instance, are 30pc higher than they were in January, while gasoline demand is less than 8.7mn b/d, roughly where it was at the start of this year.

This damp squib of a summer travel season is showing up in forecasting figures. Global oil demand is likely to be down by 6mn-7mn b/d on the year in the third quarter, the latest projections from the IEA, Opec, EIA and Argus Consulting show. An Argus Twitter poll backs up this impression. Nearly 40pc of respondents say they expect demand to fall by 5-7.5pc in the third quarter, equal to a drop in oil demand of roughly 5mn-7mn b/d.

Margins on transport fuels, such as gasoline and jet fuel, are much lower than usual. Gasoline crack spreads are at $3/bl in the world’s main refining centres, fully $10/bl below average for this time of year. Holidays are about mobility, as Chevy Chase and family discover to their cost at several points on their trip. And oil demand remains depressed while the world stays at home and away from the holiday road.

Global gasoline margins

The Driving Discussions podcast series includes Argus’ leading industry experts breaking down information on shifts in supply and demand, price trends, trade flows, geopolitical and regulatory implications, and growing low-carbon targets.
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