By conventional logic, a surge in natural gas prices would lead to a drop in demand; a drop in natural gas prices would drive demand back up.
The latter seems to be confirmed in the current price action. Gasoline prices have now fallen for seven consecutive weeks, the longest such streak since the outbreak of the new crown. With gasoline falling nearly $1 a gallon from an all-time high of just over $5 in late June, the market is expecting gasoline demand to rise again.
Falling gasoline prices are starting to lure drivers back to U.S. roads after a sharp drop in the number of drivers this summer,media reported.
Gasoline demand rose 8.5% in the week to July 22, after falling below the same period in 2020 in the first half of the month, according to the latest data from the EIA. The recovery in demand came after a drop in prices, which saw its biggest weekly drop since 2008, according to AAA (American Automobile Association).
From the data above, it seems clear that gasoline demand has risen recently because of falling prices. But Bank of America energy strategist Doug Legate takes a different view.
He posed the question: Taking a step back, has gasoline demand really declined over the past few weeks? Or is it just a product of the failure model? If demand has not declined before, but the current demand recovery is naturally not true. Legate believes:
“The drop in gasoline demand appears to be grossly overstated.”
Legate pointed out that in the fear of a recession, people naturally feel that demand has plummeted, and then prices have fallen, and this logic basically does not need to be delved into. But the problem arises here. Without further investigation, people can easily be misled by some so-called common sense.
Legate noted that data showed implied gasoline demand rebounded to 9.2 million bpd in the week to July 22, an increase of 1 million bpd from the average of the past two weeks, which is for 2022. The second highest level.
He believes it’s important to look at the data carefully, as gasoline demand has returned to higher levels from the four-week moving average. He believes “fears of an inevitable collapse in demand like the one seen in 2008 and 2009 are clearly overdone”.
Legate believes that the evidence of lower physical demand provided by the EIA data over the past two weeks is insufficient, at least not as severe as the data suggest.
The strategist concluded, especially with the rebound in gasoline demand this week, “which makes us think ‘rumors of a drop in gasoline demand are greatly exaggerated’. On July 28, as refiners Valero Energy VLO and PBF started Posting refining earnings, we will for the first time see demand trends for coal and see the outlook for refining margins rather than transient or seasonal gasoline demand trends.”