Tariffs Muddy Outlook—Could Steal U.S. Gasoline Demand

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices.

By Brian Milne

On the first of March and with the transition to April futures indexing in the primary wholesale gasoline market, early year expectations that strong economic growth would drive higher levels of gasoline demand were thrown in doubt by news the United States would impose tariffs on imported steel and aluminum that risk a global trade war, muddying the outlook.

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Some hope U.S. President Donald Trump will reconsider the 25% tariff on imported steel and 10% tariff on imported aluminum, arguing nobody wins in a global trade war, which could adversely affect economic growth. Others shrug off the tariffs, while Trump, who as a presidential candidate said he would impose tariffs on steel imports, tweeted “trade wars are easy to win.”

The equities market sold off hard on the news, and shares of Detroit automakers which are expected to see their raw material costs jump dropped back. Oil futures on the New York Mercantile Exchange fell, although were already under pressure from building domestic crude oil and gasoline inventory and a weekly decline in implied demand.

Ahead of news of the tariffs, the Labor Department reported unemployment claims had fallen to a 50-year low in late February, with a healthy labor market supporting driving demand. The market expects the Labor Department’s non-farm employment report due out March 9 to show 205,000 new jobs were created in the U.S. economy in February following job gains of 200,000 in January.

Consumer sentiment reversed a three-month decline from October 2017’s 17-year high to reach the second highest level of confidence since 2004 in February, according to the University of Michigan’s “Surveys of Consumers.”

“The highest proportion of households since 1998 reported that their finances had improved compared with a year ago and anticipated continued gains during the year ahead. Economic news heard by consumers continued to be dominated by the tax reform legislation and net job gains, which was untarnished by the consensus view that interest rates would increase and stock prices would remain volatile,” said Richard Curtin, chief economist of the surveys.

These factors bode well for growth in gasoline demand. In February, the Energy Information Administration projected year-on-year gasoline consumption would increase 40,000 bpd to a 9.33 million bpd record high this year, and jump another 70,000 bpd to 9.4 million bpd in 2019. The anticipated annual increase in consumption follows a 30,000 bpd year-on-year decline in 2017 to 9.29 million bpd, as the incentive of low retail prices experienced in 2016 faded.

EIA expects retail gasoline prices in the United States to average $2.62 gallon this year, up $0.20 gallon from 2017 and $0.47 above the 2016 average of $2.15 gallon. The wholesale market is trending higher, with futures settling at $1.9349 gallon on March 5—the second highest settlement value of 2018.

Gasoline futures closest to physical delivery on NYMEX jumped nearly $0.14 gallon on March 1 from Feb. 28 as the April RBOB futures contract moved into the front month position following the expiration of the March contract, heralding in the spring gasoline season. RBOB futures moves into backwardation when May takes over as nearest delivery, which refers to a market structure in which the contract closest to physical delivery trades at a premium to deferred delivery.

In the U.S., gasoline prices move higher from late winter to spring on expectations for greater driving demand as the weather warms, and with the transition to lower Reid Vapor Pressure ratings that cost a refiner more to produce. In some years, the gasoline market has overheated during this transition, as speculators bid up the RBOB contract to heights that choked off gasoline demand, prompting lower consumption that weakened gasoline prices.

The potential for U.S. trade partners to slap tariffs on U.S. exports could slow economic growth, especially if the Trump administration counters with additional tariffs on other products as the president suggested he would do, heightening the risk for a global trade war. And this comes at a time when the United States is increasing exports of crude oil, oil products and liquefied natural gas.

Increasing steel and aluminum prices would also push prices for durable goods such as refrigerators and washing machines higher along with other consumer goods that would be inflationary even as inflation concerns in February before Trump’s announcement of the tariffs triggered a selloff in equities on concern over interest rate hikes. Higher prices for imported goods would also boost inflation, with the Federal Reserve already indicating three to four hikes to the federal funds rate are likely in 2018.

Could these possibilities derail strong economic growth? Trump administration officials said no, saying these concerns are overblown, with steel and aluminum accounting for a small sliver of the U.S. economy.

Others note that the U.S. consumer is now raking in bigger paychecks amid tax cuts that took effect on Jan. 1 that will, to some degree, offset higher costs for consumer goods and interest rate hikes on credit cards, student loans and mortgages.

Fuel resellers will know soon enough if economic growth stalls along with gasoline demand should these costs rob consumers of their spending power if Trump moves ahead with the tariffs. The reality for gasoline demand, at least in the short run, is bigger paychecks would trump higher costs for consumer goods.

About the Author:
Brian Milne is the energy editor with DTN, an independent, trusted source of actionable insights for 600,000 customers focused on feeding, protecting, and fueling the world. Customer-centric and employee-driven, DTN focuses on empowering agriculture, oil and gas, trading, and weather-sensitive industries through continuous, leading-edge innovation. DTN is based in Minneapolis, with offices globally.