Kemp: U.S. Fuel Demand Levels Off

The initial consumption stimulus from lower oil prices may be fading, at least in the United States, according to the latest round of official data on traffic volumes and fuel sales.

Traffic on California's highway network was 2.6 percent higher in May than a year earlier, the state transportation department said.

Growth was the same as April's but lower than in March and February, and not much different from the long-term average of 2.5 percent.

In Texas, sales of gasoline and diesel were up 2 percent in April and March compared with the same months the prior year, a far smaller increase than at the end of 2014 and start of 2015, according to the state comptroller.

Nationwide gasoline consumption is running 300,000 barrels per day higher than last year, data from the Energy Information Administration shows, but the year-on-year gains have stabilised in the last three months.
           
PRICES AND INCOMES
More moderate growth in fuel demand compared with the end of 2014 and early 2015 comes as no surprise given the partial rebound in prices and a slackening economic expansion in the United States.

Average gasoline prices across the country have risen to $2.90 per gallon, still down from $3.78 last June but substantially higher than the recent low of $2.23 in January.

In California, gasoline prices reached $3.86 in May after a series of refinery problems on the West Coast, up from $2.53 in January and not much lower than in June 2014.

The national economy also hit a soft patch in the first quarter, with gross domestic product falling slightly, according to the Bureau of Economic Analysis.

Nonfarm employment continued to increase but at a relatively moderate pace in March and April, Bureau of Labor Statistics data shows.

The overall picture is of a moderate economic expansion and job gains coupled with fuel prices that are now less than $1 per gallon lower than before oil prices began to tumble last summer.
             
MARKET EQUILIBRIUM?
Most of the initial stimulus to fuel demand from lower oil prices seems to have filtered through already.

Fuel consumption is unlikely to grow much faster in the months ahead unless economic growth accelerates or prices drop again.

Stabilising oil demand is another reason to expect oil prices to remain rangebound around $65 per barrel (Brent) and $60 (WTI) in the near term.

Benchmark crude oil prices have barely changed in the last two months, suggesting the market has found a temporary equilibrium.

On the demand side, prices offer modest stimulus to consumption. On the supply side, prices have settled at a level high enough to avert a further slowdown in shale drilling but not (yet) high enough to spur widespread rig reactivations.

 
By John Kemp