A common refrain one hears these days from market bulls and reads in long-term analyses is that by 2020, the current glut in supply and decline in prices will be reversed: that the current drought in exploration and capital investment in new production will send available supply plummeting, with a complimentary spike in prices. This was the prediction of a recent IEA report, which guessed that oil prices would reach $70 by 2020.
Whether this reversal in the market occurs or not will depend in large part on global demand. In the United States, around 40 percent of crude is refined into motor fuel and gasoline, to feed the American people’s favorite gas-guzzlers.
Crude prices picked up this week, rising above $50 thanks to signs that U.S. demand for refined products is strengthening. Higher-than-expected inventory drops, together with outages in Libya, pushed the oil price up. But can the American consumer, who is the single largest consumer of gasoline on the planet, keep the momentum going?
According to numbers compiled by Bloomberg, U .S. gasoline demand is down from 2016 and consumption has fallen by 1.7 percent from last year, when prices cratered in January-February 2016 and gasoline could be had for $1.70 per gallon. Today gasoline prices are up in every US region according to the EIA by 20-30 percent, with diesel up as much as 50 percent. The average price of gas is now $2.29 per gallon, according to AAA.
Gasoline inventories hit their all-time high in February, topping out at 259.1 million barrels, according to EIA data. They’ve since declined about 8 percent, and are currently set to maintain the high levels reached in 2016. When crude oil stocks surged in early March, gasoline inventories went the other direction, posting the largest single draw-down in six years.
The higher prices deterred consumption, while the growing demand for electric cars and fuel-efficient vehicles are affecting the elasticity of demand. Long-term trends such as these could eat into gasoline consumption, as other sources of energy come to compete with it for the transportation market. Some are worried that gasoline demand may have peaked in 2016, where a record of 9.33 million barrels a day was hit, the highest level since 2007, followed by the sharp decline in January and February.
Goldman sounded an alarm bell in February, when US inventories reached their record level and expected American gasoline demand dropped to its lowest point since 2012. The Goldman prognosis was chilling: “A 6 percent fall in US demand would require a US recession.”
Yet the future decline in gasoline consumption may be exaggerated, according to Goldman Sachs. According to their figures, consumption has dropped 86,000 bpd rather than the EIA’s more extreme 460,000 bpd, while the spike in gasoline inventories is due to “transient factors” that include weather in the California deterring travel. The worries of early 2017 were replaced last week by the sudden inventory drops, a sign that American gas consumption picked back up.
A recession seems an unlikely cause for lower-than-average gasoline consumption. Instead, improvements in efficiency, the gradual increase in electric car use and even changing rural-urban economic trends have affected individual gasoline use. According to EIA data, total gasoline retail sales from U.S. refiners have been in steep decline since the 2007 high point, falling from 60 million gallons per day to 24 million gallons per day at the end of 2016. The EIA expects consumption to fall from the 2016 high of 9.33 million bpd to 9.29 million bpd in 2017, before picking back up in 2018 to 9.39 million bpd.
Current data indicates that in 2017, gasoline consumption may lag behind supply, but declines in gasoline inventories that were built up over several years may indicate a shift in expectations. A strong economy and improving activity will increase highway traffic, offsetting increases in efficiency. The much-touted rise of the electric car is, at this point, still largely speculation, with some analysts guessing that it’s all hot air. Related: Asia’s Top LNG Players Forming Buyers Club
The mystery of the sudden drop in gasoline consumption that came in January may be offset by increased consumption this spring and summer, as traffic picks up and more Americans hit the road: consumption is usually highest between Memorial Day and Labor Day weekends. When crude oil stocks surged in early March, gasoline inventories went the other direction, posting the largest single draw-down in six years, according to Reuters.
So, despite improving efficiency and other trends, there is no sign that the American consumer has lost his/her taste for gasoline. The gas-guzzling will continue, unless Elon Musk realizes his ambition to manufacture and sells 10,000 Model 3 Tesla electric cars a week by 2018.
By Gregory Brew for Oilprice.com
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