FORGOTTEN GASOLINE
EDU DDA Feb. 25, 2025
Summary: The ‘growth scare’ has come roaring back to the mainstream forefront. That only means the data is catching back up with gasoline. Wholesale gas prices have been the one straight constant over the past six to eight month. Whereas interest rates and stock prices, other financial indications have been back and forth, the fact RBOB has gone nowhere was the most profound signal out of quite a lot of that noise. This is hardly new, as energy warnings more broadly have repeatedly been dismissed at everyone’s peril.
For a couple of reasons, markets appear to have swung wildly over the last six months. Keying on interest rates, there was first the historical pattern to overcome, one which counterintuitively demands a selloff upon the initiation of any rate cutting regime. Next, the Federal Reserve passed from clear economic concern sparking rate cuts to almost immediate “regret”, having seen the economy apparently stabilize sufficiently from its perspective to go back to its institutional bias tilting at inflation which does not exist.
On top of those, from late November to mid-January, bonds were hit by a wave of dollar-induced selling. The clear and significant funding shortage which rocked the global system propelled foreign officials to action. They mobilized their reserves – a wave of Treasury liquidations – which observers and “experts” alike mistook to be inflation expectations tied to the Fed or President Trump in some way.
What’s now emerging from the fog of those fluctuations is the same “growth scare” which had shaken financial markets, even stocks, last summer and early fall. The alarm never really went away, rather detoured by a rash of artificial factors including those incorrect interpretations over the behavior of rates themselves.
One constant through it all, however, gasoline. I’ve repeatedly pointed out how wholesale gasoline was warning everyone who might listen there was no substance to the purportedly steadying economy. Stuffed only with artificiality, topped off with wild sentiment, it was bound for a reversal and, given the levels at play here, maybe even a sharp one.
This is exactly what is now re-emerging from a wide variety of data, in such a way that, like last summer, even the stock market is paying attention once more. Rates went down bigtime today, the 2-year hitting its lowest yield since October, more importantly breaking out of its recent range. The 3-month/10-year yield spreads (3m10s) actually re-inverted.
It had done so by a few basis points after Friday’s “shocking” report from S&P Global which had fixed the services PMI below fifty in contraction for the first time in nearly two years. The re-inversion was elevated yesterday and much more today after a bevy of alarming updates in between, more from the service sector and to go along with another plunge in consumer confidence.
The Conference Board’s measure fell seven points on re-emerging fears over, yes, jobs and incomes. Its expectations index dropped well under the eighty-point line, deep within the designated recession territory. Combined with declines in regional services PMIs reported by several Fed branches, the “growth scare” has been elevated across several fronts in a matter of a few days.
Exactly what the gasoline market has been saying this entire time.
Both RBOB and WTI were sharply lower today, the latter retreating like LT bond yields to its lowest since early December. Wholesale gasoline is back under $2 per gallon, down at $1.97 it is quite importantly doing exactly the opposite of what winter normally demands.
Moreover, tariffs threaten to raise the costs of distilling the oil product. If winter seasonality isn’t enough to snap RBOB out of its slump, surely such a threat like 10% hikes on Canadian oil should. American refiners, particularly those in the Midwest, source much of their raw material directly from the tar sands of their northern neighbors.
Altogether, the US obtains roughly 4 million barrels per day from Canada, which is still subject to the looming threat of a 10% government-mandated surcharge. Mexico supplies less, yet at 400,000 barrels per day it’s not nothing. And going by the latest we have from the Trump administration, all those Mexican barrels would be subjected to a 25% tax.
When announced nearly a month ago, everyone rushed to caution how it would spike energy costs, harming consumers and, of course, creating even more “inflation” for the Fed to stay on hold over.
“Expect fuel prices will rise noticeably if oil and refined products are not exempt,” GasBuddy analyst Patrick De Haan said in a post on social media. He told Reuters in a telephone interview the hit to consumers will get worse the longer the tariffs drag on.
The American Fuel and Petrochemical Manufacturers Association, which represents U.S. refining companies, said on Saturday it hopes the tariffs are lifted before consumers start to feel the impact.
Oddly enough, the same article cited above simply dismisses the factors which have kept a lid on energy costs throughout this unusually cold winter. It’s a strong case of burying the lede:
Companies involved in the wholesale fuel market said they have little choice but to pass on the added cost to consumers, especially as the post-COVID surge in fuel margins has faded away amid oversupply and weakening demand growth.
“We’re in a kind of hand to mouth situation here,” said Alex Ryan, energy director at Kansas-based Oasis Energy, which operates a travel store and partially owns a fuel retailing convenience store. [emphasis added]
You could argue oil market participants aren’t pricing the import surcharges expecting some longer-term deal to get hammered out. While possible, even the possibility it doesn’t would normally raise prices in anticipation of it falling through.
While refiners and oil middlemen may wish to reprice for that risk, they are clearly unable for “amid oversupply and weakening demand growth”, a phrase which is itself an unappreciated tautology given how the latter is the reason for the former.
Up until recently, all of this has been ignored. To be clear, it still is, it’s just that the consequences of what these markets have been pricing have finally showed up more visibly in sources the mainstream does consider.
This is not unusual, being only the flipside of interest rate theories. According to conventional wisdom driven by orthodox Economics, rates are a product of supply characteristics and assorted non-economic factors. It doesn’t matter how many times the markets don’t behave consistent with their models, they remain the sole source of mainstream interpretation anyway.
So it is, too, with oil more generally. Any deviations in crude oil therefore gasoline have been deemed solely supply related.
In 2017, for example, foreshadowing the failure of “globally synchronized growth”, Kho Hui Meng, head of Asian Trading for Vitol Group, the world’s largest independent energy trader, was interviewed by Bloomberg when he expressed caution and frustration over prices which weren’t rising anywhere close to expectations. He told the news outlet that, “what we need is real demand growth, faster demand growth.” The article characterized Kho’s comments as simply, “demand isn’t expanding as much as expected.”
“The oil market is looking for growth but there’s no growth,” Vitol’s Kho said, adding that the refiners may only get approval for the same volume of imports as last year. And while U.S. gasoline consumption is expected to hit its seasonal summer peak soon, demand growth “is not there yet,” he said.
THIS WAS 2017, THOUGH IT SOUNDS LIKE IT COULD HAVE BEEN WRITTEN IN 2023 OR 2024.
Those warnings paralleled interest rates. While the Fed was raising short-term benchmarks, having picked back up with them in December 2016 following an entire year delay, longer-term rates were resisting the hikes and, in the process, visibly flattening the yield curve. Inversion didn’t come until late in 2018, well over a year later, and this was still long before there were any of the more visible signals like eurodollar futures inversion (June 2018).
Oil was out in front of those signaling trouble during the upside. That didn’t just go along with curve behavior, we’ve seen the same here in the 2020s where OPEC has been holding back production since November 2022 for the same reasons which have also been entirely ignored.
The cartel and its members were holding back supply in 2017, as well, intending to boost the barrel price back up to around $100 where they all felt it needed to be. They took the demand shortfall so seriously, in October 2017 for the first time all members and non-members were in compliance with the group’s restrictive quotas.
Not a peep by central bankers or various Economists even as they all fixate endlessly on CPIs.
Energy is something you cannot fake in the same way macro data might be ambiguous. GDP might look decent and payroll growth positive, is it decent and positive enough? To achieve any sort of answer, use trendlines or apply context. Physical commodities like oil and energy don’t need them; they are the context.
This is why their signal has to be recast into something else when in contradiction. A shortfall of demand doesn’t fit with the overall idea of positive growth and strong economics (small “e”). Therefore, if oil isn’t behaving as if those are true, the matter must be one where supply is overabundant. As always, that’s true only in the context of demand which isn’t meeting expectations.
The most glaring example of this is the oil crash at mid-decade. Beginning in the summer of 2014, WTI and other benchmarks began a plunge that shocked the world. It was another leading indicator that purported strength in the global economy was either evaporating or hadn’t ever shown up. In the case of what became Euro$ #3, some of both.
The crude crash was easy to dismiss as nothing more than American shale production. Yet, as I pointed out back then, tremendous growth in output wasn’t a surprise, supply was not the independent variable in the price equation. Demand was, along with an increasing dose of monetary troubles. For reference, the oil curve is produced from three major factors: physical supply, physical demand, and financing. Given how we’re meant to view the last two of those, no wonder the mainstream chooses to view oil prices as exclusively related to the first of them.
Since we’re meant to believe demand is always strong thanks to central bank “stimulus”, and how there would never be tight liquidity owing to the same, process of elimination leaves the mainstream with only supply by which to explain price behavior.
And when that is no longer tenable, reality is turned to the economy’s advantage. Falling oil prices are, Economists claim, a boon for consumers. Forget the circular reasoning (crashing energy because demand is falling, crashing energy somehow fixes falling demand), lower energy costs are immediately described in the same ways as Economists treat tax cuts in their models. It sounds correct, even intuitive.
Here’s an example from late 2014 while the oil carnage was reaching its maximum stage:
…while Societe Generale global macro strategist Kit Juckes came down on the side of the consumer. “Black Friday turns cheaper gasoline into handbags. Christmas spending season is going to be much better as a result.”
Every cloud and all that. “The biggest winners on GDP ought to be the big oil importers – Japan, India and China. But the biggest feel-good factor is doubtless in the U.S., where consumers feel gasoline prices so personally,” Kit added.
If that was true, then the Federal Reserve would have begun raising rates in the middle of 2015 as planned, then kept on going from there. What ended up happening was instead a single delayed rate increase in December, then, as noted above, an entire year left on hold – after only that one solitary hike – while officials at the Federal Reserve tried to figure what had gone wrong. For one, not taking the behavior in energy more seriously.
The oil crash wasn’t a boon to consumers, it was warning on consumers. Then-Fed Chair Janet Yellen should have listened to then-Saudi oil minister Ali Al-Naimi, who, in late 2014, had helpfully spelled out what was really unfolding under the oil crash:
Global oil markets are experiencing “temporary” instability caused mainly by a slowdown in the world economy, Oil Minister Ali Al-Naimi said, according to comments published yesterday by the Saudi Press Agency. He reiterated the country’s intention to maintain output amid plunging prices.
But, in the end, Al-Naimi didn’t heed his own warning:
Steady global economic expansion will resume, spurring oil demand, Al-Naimi said, leading him to be “optimistic about the future.”
You can’t fake energy. Demand for it is price inelastic, which means modern industrial economies buy whatever they need regardless of how much it costs. The only factor which causes demand to drop is national income, meaning economic output.
If they can dismiss the 2014 oil crash as a “supply glut” when it was anything but, you can see – not condone – why gasoline prices in late 2024 and early 2025 have gone so unnoticed. What’s the big deal about gas when the worst thing about it is the price isn’t rising?
The significance is no less profound. And now the rest of the world is catching back up to it.
RBOB having gone sideways is currently being validated by the rest of the macroeconomic data, not to mention previously impervious risk markets like stocks. Furthermore, wholesale gas at the CME is directly tied to domestic demand conditions, we aren’t really talking about Chinese matters or something about the Saudis, it’s all-American.
This latest “growth scare” has been there the whole time everyone was (not) pumping gasoline. With all that in mind, what do we then make of RBOB should it no longer not rise? In other words, what if, like today, gas prices actually fall and to a significant extent then remain low? Given everything above, this is obviously a rhetorical question.
