Publications: Notes at the Margin

The US Summer Gasoline Season: Canceled; The Oil Casino: Now Open (March 13, 2023)


This report covers two subjects. However, departing from our normal practice, we begin by discussing the market. Historians may see the events of last week as some of the most important of the decade. The Federal Reserve’s chair, Jerome Powell, put the country on notice of further monetary tightening. His testimony before Congress was followed by the second-largest bank failure in US history.


There was also an oil conference in Houston. Few outside the business noticed. Those in oil and energy will find, though, that credit is suddenly very tight. Inventories will be liquidated, depressing prices.


Next, we address the normal summer surge in US gasoline demand known as the “driving season.” Chairman Powell’s announcement of ongoing interest rate hikes has just canceled it.


OPIS Head of Energy Analysis Tom Kloza published an important analysis on March 1 that highlighted the difference between January gasoline sales in the United States and peak gasoline sales. His article prompted us to test our hypothesis that peak gasoline use is linked to housing activity. We found that the Kloza data strengthened our theory.


After reading Powell’s testimony from March 7, we concluded that the US would not see a typical gasoline season this year because high interest rates constrain housing starts. This observation has been reinforced by the steady deterioration in starts and the collapse of lumber prices. Many in the oil market have missed these niceties, perhaps because they are unfamiliar with or do not pay attention to Powell or the Federal Reserve Board. The failure of Silicon Valley Bank (SVB) makes a slow gasoline season even more likely.


We conclude with an examination of the current oil futures markets, presenting data that show the global “oil casino” has reopened with a bang in 2023. Holdings of call options on Brent futures with strike prices above $90 per barrel expanded substantially in June and December compared to this time last year. Lower oil price volatility may explain the increase. However, we also note a significant decline in the outstanding puts.


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