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ANALYSIS

Gasoline demand to normalise by end-2021: Barclays

DUBAI, August 26, 2020

Gasoline demand worldwide will largely normalize by the end of next year, despite the argument that it may not fully recover to pre-Covid levels, primarily because of increased remote working, said Barclays in a new report.

“We quantitatively factor in the effect of social distancing on consumer behaviour. Our analysis attempts to reflect the current situation more accurately by bridging the gap between conventional relationships and incoming mobility data. It indicates that social distancing behaviour will likely be the key driver of the pace of recovery in gasoline demand in the US over the coming quarters barring a significant medical breakthrough,” said Barclays in its latest Commodities Research report.

The great pause: Personal mobility demand has been significantly disrupted worldwide by virus containment measures, and as several key consuming countries continue to fight the spread of virus, the outlook for gasoline end consumption remains clouded. On the surface, social distancing measures, self-imposed or otherwise, are weighing on demand for these fuels, but we highlight and assess the implications of several emerging trends in consumer behaviour that will affect the recovery in driving demand.

The US is world's largest oil consumer, accounting for roughly 20% of world oil demand last year, but is even more important for gasoline demand, accounting for roughly 35% of the world's total. We therefore look at the key trends driving US gasoline demand in detail to assess the possibility of permanent structural changes in consumer behaviour and their potential effect on driving demand.

At one point in early Q2, gasoline demand in the US was down almost 45% y/y, according to weekly data from the EIA. It recovered to about 10% below last year's level over the next three months but has since stabilized around that level. Some argue that this could be the "new normal" and that gasoline demand might not fully recover to pre-Covid levels, primarily because of increased remote working. We do not think so and believe that gasoline demand in the US and worldwide will largely normalize by the end of next year.

What drives us? Gasoline is primarily used for personal mobility, and its demand hence moves in lockstep with trends in shopping and socializing. According to the DoT's survey, work commute accounts for roughly 30% of all vehicle miles travelled in the US, with shopping, socializing, and errands largely accounting for the rest of the movement volume. Our analysis also shows that vehicle miles travelled are primarily a function of real food service and GAFO retail sales, in addition to the retail price of gasoline, which causes some vehicle- and mode-switching, and weather conditions.

However, infection concerns, especially associated with indoor spaces, and technological advancements in remote working over the years have distorted this long-standing relationship, which we rectify by including the University of Maryland's social distancing index as one of the variables. The adjusted relationship explains more than 97% of the observed volatility in miles travelled and is consistent with our view that incremental recovery in end-demand will largely depend on success in controlling the virus spread, which is critical to a revival in consumer confidence.

The return to normal: The best-case scenario for a revival in consumer confidence over the near term would be a medical breakthrough. Several vaccines are in advanced stages of testing worldwide, but it is difficult to gauge the specific timeline for the widespread availability of an effective and reliable solution. Pfizer and BioNTech, for example, expect some form of regulatory approval as early as October of this year, with plans to supply up to 100mn doses by the end of the year.

“Notwithstanding the uncertainty about the timing of a medical breakthrough, we expect US gasoline demand to continue to recover and average just 5% down y/y in Q4, compared with the expected 25% and 11% annual declines in Q2 and Q3, respectively,” Barclays said.

“We also expect gasoline demand in the US and worldwide largely to normalize by the end of next year as economic activity recovers. Some have expressed concerns about a more lingering effect of the Covid-19 crisis on oil demand for personal mobility, but we have a more sanguine outlook.

“The concerns generally emanate from a view that remote working will become significantly more prevalent than before, reducing the need for office commutes. However, we think the effect of more work from home will also drive increased spatial dis-agglomeration (reflected in recent housing data), resulting from the need for more space, which generally goes hand in hand with increased reliance on personal mobility,” it added.

“Overall, we think that oil demand will largely normalize by the end of next year, except for commercial civil aviation, which accounted for less than 6% of total oil demand last year, especially for international trips, which are likely to face political hurdles.

“But with OPEC+ flooring it on compliance to accelerate the normalization of inventories and US tight oil producers signalling continued capital restraint, we reaffirm our above-curve and -consensus outlook for oil prices next year and our call backspread trade recommendation with $35/b and $45/b Brent July 2021 options,” the Barclays report said. – TradeArabia News Service

 




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