Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Far from unexpected, the Organization of the Petroleum Exporting Countries rolled over their production quota at their meeting in Vienna, Austria, during the US Thanksgiving Day holiday, triggering a steep selloff in thinned down trading for crude oil and gasoline futures.
The 12-member producer group at their conference said they would maintain their 30 million bpd quota agreed to in December 2011, calling for strict adherence by their members. OPEC production was last reported at 30.3 million bpd suggesting a 300,000 bpd cut in their output, although OPEC has mostly overproduced their quota since it took effect in January 2012.
There were several attempts by some OPEC members to cut production to shore up oil prices that have fallen 30% from June highs, highlighted by Venezuela that needs a higher global oil price to support a failing economy. Yet, Saudi Arabia, the de facto leader of OPEC because of the size of its reserves, was steadfast in its plans to maintain its production in spite of rising supply from non-OPEC countries that have swamped the market.
Led by the US shale revolution, growing non-OPEC oil supply has displaced OPEC production. The United States has backed out its light, sweet crude exports from Nigeria, a member of OPEC, for instance.
US crude imports have averaged 1.3 million bpd or 15% below the five-year average at 7.4 million bpd in 2014 through November 21, with US refiners processing more crude into gasoline and diesel fuel than can be consumed domestically, so they are exported. The United States is a net-oil product exporter while crude oil exports from the US are restricted by US policy put in place nearly forty years ago.
The growing supply is occurring as the expansion in global oil demand remains sluggish owing to slowing growth in the world economy. In years past, OPEC would have cut their output to better match demand without worry of losing market share. Now, however, the surge in US oil production, hovering above 9.0 million bpd at a 28-year high and still climbing, threatens that scenario.
Indeed, Saudi Arabia this autumn chose to cut the price it sells its oil for in what analysts suggest is an effort by the kingdom to maintain market share instead of supporting a higher oil price. Several analysts have also suggested the lower selling price by the Saudis is an effort to curtail US shale growth.
In its release following its meeting, OPEC highlighted a “very slow and unevenly spread” recovery by the global economy, with world economic growth forecast at 3.2% this year and at 3.6% in 2015. World oil demand is expected to increase in 2015, although a projected 1.36 million bpd in new non-OPEC supply is estimated to offset the higher consumption rate.
“The increase in oil and product stock levels in [Organization of Economic Cooperation and Development] countries, where days of forward cover are comfortably above the five-year average, coupled with the on-going rise in non-OECD inventories are indications of an extremely well-supplied market,” said OPEC in their news release following their November 27 meeting.
On the news, Brent crude futures on the IntercontinentalExchange dropped nearly $8 bbl or 10.3% to $70.15 bbl, a price last seen during May 2010, with the US benchmark, West Texas Intermediate crude futures, down more than $7.50 or 10.2% into the mid $60s bbl in trading on the New York Mercantile Exchange. It was the first time since early June 2010 that the nearest delivered WTI contract fell below $70 bbl.
NYMEX Reformulated Blendstock for Oxygenate Blending futures, the US gasoline contract, dropped more than 13cts or 6.5% and below $1.90 gallon, trading at its lowest point since August 2010, on the OPEC news. For chart followers, the RBOB contract has long-term retracement support just above $1.81 gallon.
Trade volume was limited when OPEC’s decision was made public, so the price move might be exaggerated. We should see the market slow the decline and edge higher from new lows in early December. However, the long-term trend shows the crude market remains in a bear market while fundamental factors would limit any upside.
The latest leg down cements a lower gasoline price in the United States heading into year-end holidays, and into 2015. The Energy Information Administration in November projected regular grade gasoline sold at retail outlets in the United States to average $2.94 gallon in 2015, while last reporting a $2.821 national average for the week-ended November 24.
The lower price environment is a boon for US consumers, with the sharp decline in fuels costs for transportation and heating needs in the fourth quarter allowing for greater discretionary spending. Greater savings have historically generated higher driving demand, which is now reflected in preliminary demand figures from the EIA.
EIA reported the fourth consecutive week through November 21 in which implied gasoline demand topped 9.0 million bpd, climbing to its highest demand rate since late August. Since the implied demand figure reflects product supplied to the primary market, some of the suggested demand could have been generated by suppliers placing product closer to retail outlets to support higher travel over the Thanksgiving Day holiday. Winter weather along a large swath of the US Eastern Seaboard on the eve of Thanksgiving Day could have muted demand versus expectations, which would be reflected in data released December 3. Still, it was only the second four-week period in 2014 in which demand averaged more than 9.0 million bpd.