The outlook for global oil demand suddenly got gloomy, with the futures markets for crude, gasoline and diesel selling off hard in ushering in the fourth quarter, as market participants raced to the exits, unloading long positions. A tenth of a penny increase in the U.S. retail gasoline average for the week-ended Sept. 29 pushed the national price to $3.354 gallon, the highest it will be for the next several weeks.
For much of the year there was a tug-of-war between a rosy outlook for global oil demand driven by projections for an expanding world economy and growth in crude production led by the U.S. However, economic expansion in the euro zone, what little there was, has stagnated and slowed in China, which was projected to provide the lion’s share of global oil demand growth for this year.
Also unexpected was the rate of growth in U.S. crude production, now at a more than 28-year high, and sharply higher output from Libya—a country without a government—to 1.0 million bpd. Several reports note crude is again being stored offshore on tankers, while Saudi Arabia slashed its selling price, a sign the de facto leader of the Organization of the Petroleum Exporting Countries is contending with slow sales and that it chooses to hold onto market share instead of cutting output.
The world price marker for crude oil, the Brent futures contract, has dropped more than 20% from mid-June to early October, meeting the definition of a bear market. Look for oil demand growth forecasts to again be cut.
The first of those forecasts will be released Oct. 7 by the Energy Information Administration, which last projected year-on-year global oil demand to grow slightly more than 1.0 million bpd from 2013 to 91.55 million bpd this year.
Another data point to watch is EIA’s expectations for gasoline demand in the US. After climbing 160,000 bpd in 2013 from 2012 to 8.84 million bpd, EIA estimated in September that U.S. gasoline demand would slip 20,000 bpd this year. If accurate, the outlook calls for a sharp slowdown in demand for the rest of 2014 considering from Jan. 1 through Sept. 26 EIA shows in preliminary data gasoline demand up 71,000 bpd compared with 2013. The lower trend continues in 2015, with EIA last projecting a 10,000 bpd decline in U.S. gasoline demand to 8.81 million bpd.
Gasoline demand has come under pressure from less driving by aging Baby Boomers while the Millennial generation—those born from the early 1980s to early 2000s, show a general disinterest in the automobile. The biggest factor in lower gasoline consumption is, however, better vehicle mileage efficiency.
Michael Sivak and Brandon Schoettle with the University of Michigan Transportation Research Institute have tracked the mileage efficiency of new car and light truck sales since October 2007, when the mileage per gallon averaged 20.1. The efficiency rating has improved 26% from then to September when the efficiency rating averaged 25.3 mpg, and that’s down from August when the average was 25.8—the highest to date.
The federal CAFÉ standard guarantees this trend will continue. Now consider the average age of all light vehicles in operation in the U.S. was 11.4 years on Jan. 1, according to the Bureau of Transportation Statistics—the most in their data set. This suggests pent up demand for new light vehicles, and that has been reflected in vehicle sales so far this year, which have been robust.
U.S. car and light truck annualized sales in August totaled 17.5 million—near May’s high, and the most since 2006. September sales did drop 6.1% from August, but at 16.43 million were 6.7% higher than in September 2013, according to WardsAuto.
Oil demand peaks during the fourth quarter and geopolitical tensions remain high, especially in the Middle East, so we could see a price rebound for oil. However, the seasonal inclination is for US gasoline prices to decline from Labor Day into November that, combined with the current market backdrop, could press the U.S. average retail gasoline price below $3 gallon. More likely, expect the average to drop below $3.20 gallon but hold above $3.10 by mid-November.