Few companies are better at taking the pulse of the U.S. refined products market than Magellan Midstream Partners (NYSE:MMP). The MLP operates nearly 10,000 miles of pipelines that transported an average of 1.4 million barrels of refined products per day last year. Because of that, it has an excellent handle on consumption trends in the country. 

The company recently provided an update on what it currently sees in the gasoline market. After experiencing a 25% year-over-year demand decline during the second quarter, the company noted that consumption was trending toward more normal levels as we approach the third quarter. That's a very positive sign for the oil market and Magellan's business. 

A person giving the "thumbs up" sign as they pump gas.

Image source: Getty Images.

A very deep, yet narrow "V"

In early May, Magellan Midstream Partners provided its investors with an updated forecast for refined product demand. At the low end of its outlook, it anticipated a 25% year-over-year drop in gasoline demand during the second quarter. It also estimated that diesel demand would decline by 5%, and aviation fuel consumption would plummet 70%. The company thought that this trend would continue through the first month of the third quarter before staging a recovery. 

Magellan Midstream has been right on target with that outlook. Gasoline consumption did plunge by 25% during the second quarter, while diesel fell by 5%. Meanwhile, the subsequent recovery that Magellan anticipated is following its script closely. The company initially expected that demand would fully recover by July. While "refined products demand has been tracking back quite nicely," according to comments by CEO Michael Mears at a recent virtual investor conference, the company now expects a full recovery to occur a bit later in the third quarter. Overall, trips to retail and recreation destinations in most of the major markets Magellan serves are within 10% of last year's level, while commuting to work has rebounded to about 80% of the normal level.

Reason for optimism

The rapid recovery in gasoline demand is excellent news for Magellan and the oil market. In Magellan's case, it should help increase investor confidence in the company's revised financial forecast. That outlook would see the company generate between $1 billion and $1.075 billion of distributable cash flow this year. That's enough to cover its distribution to investors -- which currently yields an eye-catching 9% -- by 1.1 to 1.15 times. With that outlook looking increasingly achievable, it makes Magellan Midstream's high-yielding payout more attractive since it reduces the risk the company might need to cut its payout.  

Meanwhile, Magellan's outlook for gasoline demand also bodes well for the oil market. For starters, it suggests that the economy will continue burning down more of the excess gasoline inventory that had been piling up in storage and weighing on oil prices and refining margins. That will enable oil companies in the country to continue bringing shut-in wells back online as refineries increase their production rates. Add those higher volumes to the improved pricing, and earnings in the sector could roar back during the second half of the year.

However, as with all forecasts, this one could change on a dime. That's quite possible given the recent rise in COVID-19 cases across many states and concerns about another wave this fall. If governments start imposing new travel restrictions to slow the spread again, it would likely cause another big decline in demand.

A number to watch closely

Gasoline demand has come roaring back over the past month as governments lift restrictions on travel and non-essential businesses. That's exactly what Magellan and the broader oil market hoped would happen, since it would help fuel a second-half rebound in their profits.

However, risks to the recovery remain, especially as COVID-19 cases surge in many states, causing concerns that more shutdowns loom. Because of that, energy investors need to keep an eye on any impact this might have on gasoline demand since it could affect Magellan's ability to continue paying dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.