Sub $2 Gasoline and Robust US Vehicle Sales



Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

The US average retail price for regular grade gasoline slipped to the second lowest weekly price in 2015 in closing out November, and is poised to dive below the $2 gallon psychological threshold for the end-year holiday season, as growing inventory weighs on values.

At $2.059 gallon on Nov. 30, the national average price for all formulations of regular grade gasoline is just 1.5cts above the current 2015 low plumbed on Jan. 26 at $2.044 gallon, per data from the Energy Information Administration. A break below the $2 gallon divide last occurred in March 2009 during the Great Recession, although this year’s decline is the result of a global glut in oil supply, not waning demand amid rising unemployment.

In contrast, gasoline demand has surged in 2015, and the Department of Labor reported the national unemployment rate for October at 5%, the lowest it’s been since April 2008, with the market expecting the jobless rate to have held at the 5% mark in November.

Based on preliminary data, gasoline consumption is on par with 2008 when demand averaged 9.15 million bpd, with record demand set in 2007 at 9.359 million bpd. Through Nov. 20, EIA shows implied gasoline demand—gasoline supplied to the primary market—at 9.141 million bpd in 2015, 321,000 bpd or 3.6% above the comparable year-ago period.

The growth in US gasoline demand is driven by low retail prices and an improving economy highlighted by healthy employment. These features have also driven vehicle sales in the United States, which were 5.1% higher than in 2014 during the first three quarters of the year, according to Bank of America Merrill Lynch.

WardsAuto reported light vehicle sales in the United States reached a seasonally adjusted annual rate of 18.4 million in November, the third consecutive month with SAAR vehicle sales above 18 million.

In a recent note on the Automotive Industry, analysts with Bank of America Merrill Lynch addressed pushback from investors that suggested the cycle of new vehicle purchases is peaking.

“While there are a number of reasons why we think this concern is pre-mature, and that the cycle has a long way to run to our 20mm unit estimate in 2018, one of the most important factors driving our conviction is that miles driven is just starting to accelerate and is hitting all-time highs,” said the bank’s analysts.

In late November, the Federal Highway Administration reported the moving 12-month total in vehicle miles traveled on US roads in ending September at 3.121 trillion miles.

“Yes, 3+ trillion miles is an all-time high for miles driven, but given the relatively stagnant growth for the past five years, we think the pent-up demand for travel (and in turn vehicles) could support growth above this level for the next few years,” said Bank of America Merrill Lynch.

As bullish as this sounds for gasoline suppliers caution should prevail. True, new auto sales are surging, and new sales are dominated by light trucks and SUVs that use more gasoline than smaller vehicles. As buyers trade in their aging fleet however, with 46% of the US fleet 11 years or older in 2014 according to the bank, newer vehicles are far more fuel efficient.

The EIA in their latest Short-term Energy Outlook forecasts a modest 20,000 bpd increase in gasoline demand in 2016 from this year, “as a long-term trend toward vehicles that are more fuel-efficient continues to offset the effects of economic and population growth on highway travel.”