End of Summer Sees Swamped Fuel Market, Low Prices
Inventory Buildup in Gasoline
With U.S. gasoline inventory increasing through mid-summer, an unexpected buildup has occurred – upending the outlook for a balance between supply and demand during the second half of 2016. As of August 5, national gasoline inventory totaled 235.4 million bbl, according to the Energy Information Administration, 9.2 percent above year prior. Record high production and an above average import rate partly due to a strong dollar are both factors for the large supply overhang. Moreover, the market is oversupplied despite strong demand that’s on pace to set a record high in 2016.
What’s driving gasoline demand?
Gasoline Demand and Elasticity
Dropping below the year ago-weekly rate only three times since mid-May, data from the EIA shows a record pace for gasoline supplied to market. Cumulatively, U.S. implied gasoline demand is 3.7 percent above the comparable year ago period through the end of July and an astounding 7.0 percent more than the five-year average, a 614,000 bpd increase.
This demand increase stems from low retail prices spurred by a high level of gasoline inventory and declining unemployment meaning more road travel, resulting in record high demand. The strong demand rate amid low prices and an improving employment picture serves as testament to gasoline’s elasticity in the United States
Why are US gasoline imports so strong when domestic supply is at a surplus?
A combination of high gasoline supply internationally and a strong dollar has lured more imports to U.S. shores. Increased refining capacity in the Middle East and Asia has boosted the amount of available gasoline globally, bolstering competition among suppliers to boost US gasoline imports. Global economic headwinds have also prompted central banks around the world to lower interest rates and adopt policies to stimulate their economies that, in turn, weakens their currencies. In this environment, the US dollar has strengthened against rival currencies and attracted a higher level of gasoline imports than usual.
National Gasoline Price Outlook – Still Dropping
Oil prices remain volatile, but Milne expects crude prices to drop into a $35-$40 per barrel range as peak summer driving demand ends and refiners shut units for seasonal maintenance. With a current national average price of around $2.15 per gallon for regular grade in early August, gasoline prices are expected to slide another $.30 to around $1.85 per gallon late in the third quarter, early fourth quarter.