(John Kemp is a Reuters market analyst. The views expressed are his own.)
* Chartbook: tmsnrt.rs/2S6klHd
By John Kemp
LONDON, Jan 29 (Reuters) – U.S. gasoline consumption was flat in the first 10 months of 2018 as escalating motor fuel prices offset the impact of a strong economy and big employment gains.
Flat-lining U.S. gasoline consumption combined with surging U.S. shale production and a slowing global economy to push the oil market towards surplus and explains the plunge in prices late last year.
Gasoline consumption averaged 9.34 million barrels per day (bpd) between January and October 2018, which was slightly down from 9.36 million bpd in the same period in 2017.
Full-year consumption is forecast to have declined by around 40,000 bpd, according to estimates from the U.S. Energy Information Administration (“Short-Term Energy Outlook”, EIA, December 2018).
Consumption has shown little or no growth since 2017 after four years of variable but strong gains between 2013 and 2016 (“Petroleum Supply Monthly”, Energy Information Administration, December 2018).
Fuel use has flattened off even as the rate of economic growth has accelerated to an annual rate of more than 3 percent and almost 5 million non-farm jobs have been created since the end of 2016.
But stagnating gasoline consumption has been consistent with a sharp slowdown in the growth of traffic on the nation’s roads in the last two years (tmsnrt.rs/2S6klHd).
Traffic volumes surged between 2014 and 2016, with vehicle-miles travelled often rising at year-on-year rates of 2-3 percent or more, but slowed sharply in 2017 and 2018, with gains slowing to 1 percent or less.
Traffic volume in the three months from September to November 2018 was just 0.3 percent higher than in the same period a year earlier (“Traffic Volume Trends” Federal Highway Administration, December 2018).
In the last quarter of a century, traffic growth has been closely correlated with both the state of the economy and changes in the cost of fuel.
While the economy has remained supportive, higher oil prices have been strongly negative for gasoline consumption.
Falling prices between 2014 and 2016 provided a stimulus to consumption but subsequent rises have caused that effect to unwind.
The deceleration in U.S. gasoline consumption is one reason climbing oil prices helped push the global oil market towards a surplus in 2018 and why prices needed to fall to rebalance production and consumption.
The impact of rising prices on U.S. motorists also explains why they are so sensitive for U.S. politicians and why President Donald Trump aggressively pressed OPEC to bring prices down last year.
Finally, stagnating U.S. gasoline consumption explains why the oil market has become ever-more reliant on emerging markets and freight transport to absorb output growth from U.S. shale and other sources.
Global oil consumption growth and prices have become increasingly sensitive to changes in economic growth outside the United States and the other advanced economies.
As signs of a global slowdown in trade became evident in the second and third quarters of 2018, it became increasingly clear consumption growth would decelerate and prices would have to decline.
Once the United States decided to grant generous sanctions waivers to Iran’s most important customers, allowing them to continue buying the country’s crude, the last remaining support was removed and prices fell.
Lower prices are a necessary part of the market’s rebalancing process and, over time, should help restore some consumption growth in the United States and more importantly in emerging markets.
But with so much consumption growth now geared towards China and other emerging markets, the outlook for market balance and prices in 2019/2020 will remain dominated by concerns about a possible global slowdown.
Until the threat of a global slowdown is lifted, oil prices will struggle to recover, despite the efforts of OPEC and its allies to reduce production.
Editing by Edmund Blair