Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Preliminary crude oil and gasoline data from the US federal government detailed some big numbers for late May, including a spike in implied gasoline demand to the highest weekly rate in nearly eight years, while refiners and blenders produced more than 10 million bpd of gasoline for only the second time, per available records.
Implied gasoline demand, which refers to the number of barrels of gasoline supplied to the primary market, spiked 473,000 bpd or 5.1% to 9.734 million bpd during the week leading up to the Memorial Day weekend, data from the Energy Information Administration shows. It was the highest weekly implied demand rate since August 2007, when gasoline consumption was surging and high on the discussion list for market followers was talk of “peak oil” and expectations gasoline demand would continue to climb unabated year after year.
It didn’t turn out that way, with US gasoline demand now seen in structural decline because of improvement in vehicle efficiencies due to both market demands when gasoline prices were sky high and federal policy that requires greater miles per gallon each year for newly manufactured vehicles. Changing behavioral trends, i.e. less commuting for work and shopping, younger drivers eschewing driving, have also contributed to fewer miles driven on US roadways.
Yet, since the crash in oil prices from June 2014 highs, a number of market analysts have repeatedly commented on expectations for greater gasoline demand because of lower costs at the pump. Demand has trended higher in 2015, 3.3% greater than in 2014 from January 1 through May 22, while the mileage efficiency ratings for new vehicles purchased has slipped since reaching a high in August 2014. Indeed, sales of sport utility vehicles and pickup trucks are trending higher, capturing 54% of the market in April, up 3% from March.
The new bounty in US oil production, owing to the technical prowess of US firms in harnessing fracking and horizontal drilling, has pushed output to more than 40 year highs, with the EIA recently revising their production rate to the upside. For the week-ended May 22, EIA said US production averaged 9.566 million bpd. Weekly EIA data only goes back to 1982, but using monthly statistics, it was the greatest production rate since 1971.
The growth in US crude oil production has saturated the domestic market since very little is exported due to restrictions also dating back to the 1970s, imposed after the oil embargo by the Organization of the Petroleum Exporting Countries. The jump in crude supply has translated into exports of oil products such as gasoline and diesel. EIA shows US oil product exports averaged 1.394 million bpd during the four-week period ended May 22, 470,000 bpd or 51% more than during the comparable year-ago period. US finished gasoline exports averaged 517,000 bpd of that total, 121,000 bpd or 31% more than during the same four weeks in 2014.
US refiners and blenders net finished gasoline production was 10.164 million bpd during the week-ended May 22, with the previous high registered during the final week of 2014, helped in part by refiners looking to reduce end-year taxes on crude held in inventory. A high processing rate is expected to continue during the summer.
The holiday truncated trade week through May 29 experienced wide price swings by the New York Mercantile Exchange RBOB (reformulated blendstock for oxygenate blending) futures contract due to technical factors, such as the June contract’s expiration, US dollar gyrations, with the dollar having an inverse relationship with domestic crude prices, and geopolitical tension, including gains made by the Islamic State in Iraq and Syria and a second suicide car bombing by IS in Saudi Arabia. NYMEX RBOB futures traded at a $2.0969 better-than six-month high on the spot continuation chart the day following Memorial Day, only to drop back below $2.00 gallon during the very next session.
Fundamental factors remain in the fore, evidenced by the rapid price recovery by the NYMEX RBOB contract on May 28 from a $1.9363 gallon five-week spot low traded in front of the most recent EIA Weekly Petroleum Status Report for May 22. The contract reversed higher on the late morning publication of the weekly data, and rallied to a $2.0729 gallon intraday high on May 29, pushed higher, in part, by larger-than-expected drawdowns in domestic gasoline and crude oil supply, and the surge in implied gasoline demand.
The price rally was also fueled by a proposal from the Environmental Protection Agency which cuts the amount of ethanol to be mandated in the gasoline pool for years 2014, 2015 and 2016 from statutory levels, translating into more demand for gasoline. The EPA said its proposal was based on “blend wall” concerns, which refers to the 10% maximum content for ethanol in gasoline allowed in all vehicles on US roads based on law, automaker warranties and consumer preference.
Does this mean the US is back on track to experience gasoline demand this year at the 2007 rate, which averaged 9.286 million bpd—the highest on record and the last year with demand above 9.0 million bpd?
Likely not, with improving vehicle efficiencies seen stemming such a surge in as many barrels burned by automobiles and trucks. Although gasoline demand will trend higher this year and likely continue into 2016, pre-holiday supply stocking likely grew the implied consumption figure.
Suppliers will stage gasoline closer to retail outlets to ensure rapid refueling during busy holiday weekends such as Memorial Day, the unofficial kickoff to the summer driving season. If history is a guide, expect implied gasoline demand to ease from the per-holiday spike.