While the media continues to blast the occasional OPEC production-related headline, the reality is that crude supply is increasingly becoming a shale story, as the US, now tens of billions in debt lighter – has rapidly emerged as the low-cost, marginal oil producer. As such absent a sharp rebound in prices in the coming 3 months, OPEC is almost guaranteed to revert to its prior production regime, as Saudi Arabia is already pained by the loss of market share to increasingly lower cost US producers, who as shown in the charts below, have seen their all-in production costs plunge thanks to rapid technological advancement.
And yet, when trying to forecast the price of oil, it is becoming increasingly clear that the answer is not on the supply side at all but rather on the demand, where as we have been writing for the past month, things are getting quite troubling. While we urge readers to familiarize themselves with our recent coverage of collapsing gasoline demand to a level which according to a perplexed Goldman Sachs suggests the US economy should be in a recession…
… other troublesome indicators have emerged confirming that not all is well on the demand side. The latest evidence comes from a recent report by Deutsche Bank which shows that the number of miles driven in the US is not only slowing, but in December, it posted the smallest monthly increase since November 2013.
As DB’s Mike Baker writes, “we have hypothesized that the increase in gas prices could pressure miles driven, which as noted below slowed in 2016 versus 2015, and even more so towards the end of the year after the Thanksgiving inflection. The 0.5% increase in miles driven in December 2016 is the smallest monthly increase since November 2014. Gas prices inflected around Thanksgiving 2016 and are up year-on-year on a weekly basis over the last 15 weeks.”
While looking at the above chart of year-on-year change in monthly miles driven in 2016 versus the year-on-year change in average monthly gas prices, Baker notes an approximately (60%) correlation. He then notes that the concern is that gas prices were up only 14% year-on-year in December 2016. The reason why this is troubling is that while there is still no concurrent data, the national average price was approximately $2.23 per gallon as of February 27, 2017 and the price per gallon has increased more than 30% year-on-year over the last three weeks.
In other words, if the deterioration in the trendline persists, it would imply that some time in January of February, we got the first negative print in miles driven in years, and would also explain the recent collapse in gasoline demand.
Some final thoughts from Baker:
Looking back at recent history, while we’ve seen several small pockets of higher year-on-year prices for a few weeks at a time, gas prices have generally been lower year-on-year on a weekly basis for the last three years. The data we are seeing today is more similar to the increases witnessed late 2009 through 2011. While we would agree that economic / employment pressures also negatively impacted miles driven, though perhaps less so into 2010 and 2011, we would note that annual miles driven increased only 0.3% year-on-year in 2010 following a very easy (0.7%) compare from 2009 and then declined (0.6%) in 2011 against the 0.3% increase from 2010. While the absolute price per gallon is considerably lower as of February 2017 relative to 2010 and 2011, we would also note miles driven are much higher relative to that time frame and even a smaller decline on a percentage basis could have a similar impact on the total miles driven.
The implication is that the US motorists’ sensitivity to rising prices is now far higher than it was even 5 years ago, when the economy was supposedly in far worse shape. While on the surface that would suggest that something is rather wrong with the financial state of the average US consumer, the more immediate implication is that the higher oil – and gasoline – prices rise, the less miles will be driven, the weaker the end demand for gasoline, and ultimately, the greater the gasoline, and crude, inventory glut as the world continues to produce assuming recent demand trendlines, trendlines which with every passing week, we learn are no longer applicable.