Oil Prices and US Gasoline Demand Growth

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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

West Texas Intermediate crude oil futures have again nosed above $50 bbl early in the second quarter, trading at a roughly $6 bbl discount to global oil prices, with renewed discussion in the market again that oil prices have found their bottom after a better-than eight-month nosedive, with signs of higher demand both domestically and globally the catalyst for the outlook.

The sentiment can be viewed through trader position data from the Commodity Futures Trading Commission, which shows bullish bets by speculators for the New York Mercantile Exchange WTI futures contract spiked 9.6% during the week-ended March 31 from a two-year three-month low. If this expectation is correct, then the WTI contract registered a $42.03 bbl multiyear low March 18 after freefalling $65.70 or 61% from a 2014 high reached in June of $107.73 bbl.

Gasoline futures on NYMEX were again on the upswing early in the second quarter after trading in a nearly 30cts gallon range in March, holding below the March 2 $1.9779 gallon three-month high on the spot continuation chart. A resurgent crude futures market could boost the Reformulated Blendstock for Oxygenate Blending futures contract over $2 gallon if the rebirth in oil price bullishness has durability.

In post-Easter trade, oil prices shot up on news Saudi Arabia increased the price of crude oil it sells to Asian buyers for the second consecutive month. Since the Saudis accelerated the collapse in oil prices in late 2014 by declining to cut output and instead, saying it would look to maintain and even expand its market share, higher offer prices by the world’s largest swing producer signaled demand must be getting better.

The higher offer price by the Saudis comes against a backdrop of easy money policy across much of the world amid low interest rates and economic stimulus action taken by the European Central Bank, China and Japan that would goose oil demand higher if effective. These actions, aimed at improving sluggish to no growth economies comes after the United States ended its bond buying stimulus effort in the fourth quarter 2014, and now targets lifting the important federal-funds interest rate from near zero for the first time since 2008. These central bank and policy actions have worked to strengthen the US dollar.

A stronger dollar limits the upside of US priced crude oil, with WTI the domestic price benchmark. A stronger dollar, while a net positive for the US consumer, also makes exports more costly for foreign buyers thereby curbing this demand. Some analysts believe the stronger dollar was a key factor in why US job growth was a paltry 126,000 in March, the first month with job growth below 200,000 since February 2014 and the lowest month for job creation since December 2013.

Preliminary data from the Energy Information Administration shows US gasoline demand 4.1% higher during the first quarter compared with a year ago, averaging 8.805 million bpd. Weekly EIA data shows implied US gasoline demand spiked to 9.435 million bpd during the final full week of March, the most so far in 2015. In analyzing 2014 data, the 9.435 million bpd demand rate would rank as the fourth highest for last year, with the final two weeks of 2014 capturing the first and second highest weekly rate of demand in 2014.

Will this trend continue?

Historically low gasoline prices have clearly provided impetus for increased demand, demonstrating price elasticity. How sensitive is demand to higher gasoline prices now, as we transition to summer gasoline grade specifications and greater driving demand during the warm weather months?

One clue can be observed by the vehicles US consumers purchase.

Researchers Michael Sivak, Ph.D. and Brandon Schoettle with the University of Michigan Transportation Research Institute reported the average fuel economy per the window-sticker value of new vehicles sold in the United States in March increased 0.2 miles per gallon from February to 25.4 mpg. The researchers noted the improvement in fuel economy occurred as gasoline prices increased in February and through much of March, while adding new vehicle sales fuel economy remains down 0.4 mpg from their peak reached in August 2014.

Just as consumers increased their purchases of light-duty trucks and SUVs when gasoline prices were crashing, will they again look to stricter fuel economy standards in their vehicle purchase should gasoline prices continue to ramp higher?