Summer Fuel Demand Disappoints, Challenging Economy

A swift recovery in fuel consumption by U.S. drivers is petering out, posing new challenges to the oil market, economy and global energy industry.

After demand for gasoline surged from mid-April to late June, consumption has stayed relatively flat in the past two months and remains well below its prepandemic levels, government data show. The fizzling rebound highlights the lingering effects of coronavirus precautions and travel restrictions. Even as some states advance business reopening plans, rising cases in other parts of the country are fueling caution among consumers.

Many companies have delayed plans to reopen offices, while many school districts and colleges around the country are opening with hybrid or remote instruction, taking a bigger bite out of fuel demand.

The trend is a threat to the economy because people tend to spend more money when they are moving around and engaging with businesses. Some analysts think gasoline demand will need to rise for the economic recovery to continue at its current pace, especially with many Americans avoiding public transportation due to coronavirus concerns and seeking to take vacations before summer ends.

Combined with other data points showing that improvements in consumer spending and hiring are cooling, the slower increase in fuel demand illustrates that the next phase of the economic recovery could be more difficult.

The stalled demand rebound is helping keep U.S. crude-oil prices stuck in the low $40s per barrel, even with the Organization of the Petroleum Exporting Countries and companies from Exxon Mobil Corp. to Chevron Corp. curbing supply in response to the industry turmoil. Oil has remained in a narrow trading range for two months following a swift rebound after prices in April briefly dropped below $0 for the first time.

As a result, fuel prices also have remained flat recently, a boon for those consumers who are able to take advantage at the pump but a threat to energy companies whose spending cuts and layoffs could add to the pressure on the economy.

"The easy work has been done," said Noah Barrett, an energy analyst for Janus Henderson Investors. "That last 10% to 15% of lost demand is going to be really hard to get back." He is cautious about the oil-price recovery because of the questions about demand.

U.S. motor gasoline supplied by energy companies, a proxy for demand, stayed at roughly 8.6 million barrels a day for two months through mid-August before jumping to 9.2 million barrels a day during the week ended Aug. 21, according to the Energy Information Administration. That is up from a low in April around 5 million barrels a day but well below the figure of 9.7 million barrels a day from mid-March, before lockdowns took hold in much of the country.

It also is below last summer's driving-season peak of close to 10 million barrels a day. Demand for distillate fuel including diesel has followed a similar pattern, while consumption of jet fuel is still weak with air travel limited.

"We are at this tenuous point where prices have recovered nicely from the abyss we were in a few months ago but are still at very challenging levels for the industry," said Jennifer Rowland, senior energy analyst for Edward Jones.

Investors say that unless demand picks up, even more energy companies will be forced to file for bankruptcy or pursue mergers and acquisitions in the months ahead. More than 30 North American energy exploration-and-production companies filed for bankruptcy in the first seven months of the year, according to law firm Haynes and Boone. Consulting firm Rystad Energy projects that about 150 more will seek chapter 11 bankruptcy protection through 2022 without higher prices.

"The whole industry is reeling," said Regina Mayor, who leads KPMG's energy practice. "It will take through the end of 2021 at the earliest to fully see anything like what we had in 2019 for fuel demand."

Shares of energy producers have fallen more than 20% from a peak hit in early June. The energy sector is lagging behind even as gains in technology shares power the S&P 500 to records.

The demand uncertainty is forcing producers to remain cautious with drilling new rigs and denting profits for refiners that turn oil into fuel.

"We're seeing a slow recovery, which is headed in the right direction, but we're just anticipating that it could take a while to get back to normal," Michael Hennigan, CEO of refiner Marathon Petroleum Corp., said on the company's most recent earnings call last month. Marathon and other refiners such as Phillips 66 and Valero Energy Corp. are processing less crude and limiting spending.

Marathon last month agreed to sell its gas stations to the owners of the 7-Eleven convenience-store chain for $21 billion.

In a reminder of the energy industry's waning influence on financial markets, Exxon was replaced Monday in the blue-chip Dow Jones Industrial Average. Chevron remains in the 30-member stock index.

"It's emblematic of the struggles that the energy sector has faced," Janus Henderson's Mr. Barrett said of the change. "The lack of interest in owning a lot of these stocks is still pretty high."

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com


  (END) Dow Jones Newswires
  09-01-20 0544ET
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