WTI crude has lost ~9.5% over the previous week, landing at $89.26/bbl, losing essentially all the gains it had made since Russia invaded Ukraine. It was the largest one-week percentage decline since April, amid growing fears that oil demand could collapse if there were to be a full-blown recession.
While the drop in prices has been bad for oil producers, it has particularly hit refiners like Valero Energy (NYSE: VLO), Marathon Petroleum Corp.(NYSE: MPC), and Phillips 66 (NYSE: PSX), who have seen their refining margins, or crack spreads hit hard.
Refiners had been enjoying historically high profits, as the profit from making a single barrel of gasoil, the feedstock for making diesel and jet kerosene, hit a record $68.69 in June at a typical Singapore refinery. The margin dropped to settle in the high 30’s a few weeks later. At the end of last year, that profit was at $11.83, and at the same time in 2021 it was under $9.00.
But now, crack-spreads are collapsing. According to Refinitiv data, Asian gasoline margins plunged over 102% in July to a discount of 14 cents per barrel to Brent crude, which was far from the $38.05 per barrel they had been in June. Asian refining margins have collapsed to $0.88 per barrel over Dubai crude, from a record $30.49 in June.
The collapse in prices has been so massive that some analysts are now accusing the Biden administration of fabricating low gas demand data in a bid to move oil prices lower.
In late June, the Energy Information Agency shut down all reporting for several weeks, a shutdown ostensibly caused by a server malfunction. However ForexLive has noted that since EIA reporting came back online, gasoline demand data has been consistently bad. ForexLive commented, “Maybe there’s an issue with reporting or maybe it’s a conspiracy.”
Now even Wall Street has begun questioning EIA data.
Bank of America energy strategist Doug Legate wrote a note to clients which he titled, the “fall of gasoline demand appears grossly exaggerated.’’
Legate wrote in the note, “For the week ending July 22nd, implied gasoline demand rebounded to 9.2 million b/d – a 1 million b/d increase vs the last two week average, and the second highest level of 2022.” Immediately thereafter, the EIA reported a massive drop in gasoline demand, which prompted a Piper Sandler global energy strategist to call the data “crooked,“ saying the methodology left, “significant room for error.”
In their note, Piper Sandler noted, “We are supposed to believe that in July, in the middle of driving season we are only using 8.6 million barrels per day. That would be down half a million barrels a day from May of this year; that would be below the Covid low of 2020. So we ask all the refiners, we ask all the retailers, we ask everybody that reported earnings this season. Every single one of them tells you that their sales are not down materially from even pre-covid days. Some report record high sales.”
U.S. refining giant Valero’s CEO, Gary Simmons, when asked about the supposedly falling gasoline demand in an earnings call said, “I can tell you, through our wholesale channel there is really no indication of any demand destruction… In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system.”
Adding to the confusion, demand data from GasBuddy is considerably at odds with the EIA data. GasBuddy tracks retail gasoline demand at the pumps in the United States. According to GasBuddy data, gasoline demand rose 2% last week. However the EIA reported that there was a 7.6% drop in demand over the same time period.
The Biden administration has been tremendously concerned with the price of gasoline, due to both the effects on his party’s prospects in the midterm elections in the fall, and due to the longer term effects, given high gas prices drive inflation, which is precipitating Federal Reserve rate hikes, which will cool the economy and possibly trigger a recession – which could last into and affect the 2024 election cycle.
Regardless of the motivation, the question becomes, how will the markets trade if government data becomes unreliable, and where might the lines be drawn. Could a leader seeking to fuel economic growth for whatever reason, affect the Consumer Price Index numbers? Would it be justifiable to massage job numbers to achieve a certain market outcome?
If it is revealed gas demand data was in any way altered, is the administration responsible for the losses of investors in refiners who saw crack-spreads crushed and profitability destroyed? Are they responsible for trades made using prices based on fraudulent data?
This could be come a much bigger scandal going forward, if, as they say, all sins are ultimately revealed.