Almost to the day one month ago, when oil was trading at $52.25/bbl, I noted higher oil prices faced strong headwinds. I mentioned several factors that would likely result in lower oil prices, with the largest being the oversupply of oil in an environment where drilling activity was picking up. Fast forward to today and the price of spot WTI has fallen 12.8% to $45.55/bbl. Additionally, supply does not seem to want to abate as the rig count has increased to 870 rigs this week versus 839 in the month ago article.
A faster pace of supply growth continues to be the overriding issue, although demand continues to increase as well, but yet to reach pre-recession levels. Certainly, the below trend rate of economic growth is playing some role in the lower overall demand for petroleum products.
Another factor in the slowing rate of demand growth is energy efficiency improvements made to a number of petroleum consuming parts of the economy. One significant area of improvement is in the area of vehicle gas mileage. This is important as gasoline is the main petroleum product consumed in the U.S. and accounts for nearly 47% of petroleum consumption.
As the first chart below shows, since 2014, consumers have consistently driven more miles year over year. This has translated into continued growth in total vehicle miles driven on a rolling 12-month basis and finally surpassing the pre-recession peak in 2015.
The efficiency is most evident in the below chart that shows miles per gallon for all vehicles (red line) along with gallons consumed per vehicle in a given year (blue line). Improvement in both of these areas has slowed the growth in the demand for petroleum products.
In conclusion, a below trend pace of economic growth and efficiency improvements have served as a headwind to higher oil prices, especially in an environment were drilling activity is increasing. The article from a month ago also discussed the potential oil price headwind resulting from a stronger U.S. Dollar, vis-à-vis, potentially higher interest rates. This may become a more significant factor next month as the odds of a Fed interest rate hike in June are now around 75%.