Flood Fears Flop
As the focus on demand destruction starts to take hold and refiners start to downplay the risk to refineries, the market started to focus on diminishing demand outlook all over the globe. The key thing to remember is that if there is minimal damage to refineries then the flood will do more damage to demand than to supply.
Some soothing words from some refiners that their operations most likely would not be impacted by the flood and a bearish Energy Information Agency supply report helped cause a selloff that caused gasoline to hit the 25¢ circuit breaker, pausing trading in heating oil and crude oil. Now add to that the potential demand destruction in Europe as credit fears flame and fear that inflation in China may cause the government to try to slow demand caused a reversal of epic proportion.
I thought the Mississippi River flood was going to make a liar out of me. Last week I had boldly predicted that our rising gas price surge nightmare was over. Of course the flood related rebound turned a dead cat bounce into more like a Rocky Squirrel type bounce. Yet some tough words from German Chancellor Angela Merkel and disturbing data out of China overcame the fears of the flood. The build in gas supply also helped. The EIA reported that total motor gasoline inventories increased by 1.3 million barrels last week and are in the lower limit of the average range yet the increase seemed to suggest that refiners are turning the corner. The EIA gave the bear’s great news when they reported that gasoline production increased last week, averaging nearly 8.9 million barrels per day.
More stories overnight are adding to the negative sentiment. The Wall Street Journal reports, “The fiscal crises in Greece, Ireland and Portugal could yet spread to other parts of the Eurozone and parts of Eastern Europe", the International Monetary Fund said Thursday. In its twice-yearly report on the European economy, the IMF said that while financial integration had contributed to the buildup of government debts in the three crisis countries, further integration would be necessary to help the Eurozone tackle its problems.
The International Energy Agency as reported by Reuters said, “At $3.7 a gallon in April, retail prices are now well in the $3-$4 gallon threshold that typically triggers a fall in vehicle-miles travelled," it said in its monthly report. "We believe gasoline demand will indeed disappoint this year — rising seasonally but nonetheless declining on a yearly basis if retail prices remain at current levels. "The Paris-based energy agency estimates that U.S. demand fell by 2% year-on-year on average in March and April. It added that weekly-to-monthly revisions over the past 12 months suggest gasoline demand has been persistently overstated by preliminary data, which tend to count exports as domestic deliveries. While the continued economic recovery, growing employment and still-weak new vehicles sales of more energy efficient cars could support gasoline demand, the agency expects some reduction in discretionary driving. "Anecdotal evidence points to increased internet shopping, partly shifting demand from gasoline to freight-related diesel, which is more price inelastic," it said.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.