John Auers and John Mayes
While low prices have made life tough for U.S. crude producers over the last couple of years, those same low prices have been a cause of celebration for motorists and refiners alike. They have resulted in record levels of motor vehicle use and fuel demand, leading to healthy gasoline margins and record crude runs by U.S. refiners; however, the first couple of months in 2017 have seen the beginnings of what could be a reversal of fortunes between producers and refiners. Somewhat stronger crude prices and improved drilling efficiencies and cost control have led to increased drilling activity and a return to growing U.S. crude production. At the same time, these higher prices have slowed gasoline demand and resulted in record inventory levels. This past week saw some refiners announce rate cuts in an attempt to stem the storage builds, and others are considering similar steps. Is this just a temporary situation and will strong demand return as we approach the summer driving season? Or, on the other hand, is this the beginning of a resumption of a longer-term trend of lower gasoline consumption which prevailed prior to the 2014 price crash? Refiners are certainly hoping for the former as they echo Willie Nelson in encouraging motorists to get “On the Road Again.”
“Seein’ Things That I May Never See Again”
The last four decades have seen several reversals in gasoline demand dynamics in the U.S., and it seems each time industry forecasters got ahead of themselves in forecasting “peak demand.” It first happened back in the bleak days of Middle East oil embargos and Carter Administration “stagflation,” when the 1978 U.S. gasoline consumption figure of 7.4 million BPD was thought to be a level “that may never be seen again.” And for over a decade, it appeared the pessimism was justified as demand shrank by almost 1 million BPD and stayed below the 1978 figure for the entire decade of the 1980’s; however, by the second half of that decade, a shift was already evident. Low prices caused a resumption in gasoline demand growth and consumption reached a new record in 1993. Growth continued unabated for the next 14 years and fresh “peaks” were established in every single year through 2007, reaching almost 9.3 million BPD. With the return of high prices and the global recession in 2008, we saw another reversal in the trajectory for gasoline, and demand fell by 600 MBPD from 2007 through 2012. With government-imposed mileage standards (through the Corporate Average Fuel Economy program becoming ever more stringent), demographic trends such as “work from home” and reurbanization patterns negatively impacting driving habits, and electric cars starting to make a dent, it again became “conventional wisdom” that gasoline demand had peaked. But alas, the experts were wrong again, as growth resumed and accelerated with the drastic drop in pump prices in 2014. Although final EIA numbers aren’t available for December, it appears that the 2007 peak is likely to have been slightly eclipsed in 2016, with a preliminary estimate of right at 9.3 million BPD.
“Goin’ Places That I’ve Never Been”
As noted in our opening paragraph, 2017 hasn’t started off in the best way for refiners, with weekly gasoline demand numbers down from the same period in 2016 by an average of over 500 MBPD. This YOY declining trend actually began at the end of 2016 and has led to record levels of gasoline in storage and the lowest gasoline margins we have seen in some time. It is also causing refiners to review their operating strategies after running “full out” over the last couple of years to satisfy strong domestic and export demand. Recently, Marathon announced they are cutting runs at their Catlettsburg, Kentucky plant, while PBF is reducing production at both its Toledo, Ohio and Chalmette, Louisiana refineries.
“The Life I Love is Making -Gasoline- For My Friends”
U.S. gasoline demand is impacted by both long-term and short-term trends. For several decades, shifts in population demographics, commuting and work patterns, and teleconferencing slowed growth initially, and in recent years, has caused consumption to decrease. Younger people drive less and tend to live closer to their work than the preceding generation. The use of mass transit and telecommuting also continue to increase. A significant, recent addition to the downward pressure on consumption has been the steady improvement in vehicle mileage requirements brought on by the CAFE program. Beginning with the 2012 model years, the mileage targets have been set through the 2021 model years with potential improvements through 2025.
Imbedded within these long-term trends is short-term trends driven by gasoline price changes and even the vehicle miles traveled (VMT). In the early days of CAFE, consumers responded to the improving vehicle economies by driving more. By 2014 however, consumers were becoming accustomed to the higher vehicle efficiencies and VMT growth began to decline. A resurgence in gasoline demand developed in the second half of 2014 after prices collapsed. While it is well established that gasoline demand growth correlates with changes in gasoline prices, this relationship also diminishes with time. When gasoline prices fell at the end of 2014, gasoline demand began to surge upward. Over time however, this growth has gradually abated as consumers became accustomed to the lower prices. As the novelty wore off, so did gasoline demand growth. As the short-term stimuli are ending, gasoline demand is reverting to its long term patterns.
So will U.S. drivers get “on the road again” or was 2016 the real “peak” in gasoline demand? In our recently issued 2017 Crude and Refined Products Outlook (C&RPO), we provide a 20-year forecast of not only U.S. gasoline demand, but also demand for all refined products on both a regional and global basis. In developing this forecast, we consider all the factors we discussed in this blog: demographics, economic growth, alternatives, fuel efficiency regulations and other potential government policies. Of course, price direction will be critical as U.S. drivers have shown that they respond strongly to price movements in both directions. Included in our C&RPO is a detailed forecast of both crude and product prices for all the key regions worldwide. These prices not only impact demand but are also themselves impacted by consumption dynamics. Supply of refined products is also a key part of the equation and we include an analysis and forecast of the impact of new refinery projects on the supply of gasoline and other products in the C&RPO. A more detailed assessment of refinery construction activity and market impacts is included in another report we recently issued, the World Refinery Construction Outlook (WRCO). For more information on these reports or on any of our other analyses or consulting capabilities, please send us an email or give us a call.