Gasoline prices in the United States have been on a roller-coaster ride since June 2014. For a while, it seemed that they were at a plateau. However, since May the roller-coaster went down again, going through the summer season which goes against the norm of prices holding steady, if not up, from the beginning May to the beginning of September. Why is that?
The short answer is: there has been a buildup in U.S. gasoline stocks (i.e., gasoline glut =240 million barrels) even in the middle of the summer driving season. Moreover, summer gasoline demand did not go up as high as was expected. There has been an increase in global refinancing capacity coupled with changes in regulations in China that have allowed Chinese teapot refineries (which are small refineries with relatively high costs) to export refined products abroad. There was also a surge in capacity utilization which jumped from 86 percent in January to about 93 percent in July of this year. The recent decline in oil prices has also driven down gasoline prices. These factors have important implications for gasoline and oil prices for the remainder of this year.
These factors have directly affected current gasoline prices. Since Memorial Day of this year, the average price of a gallon of gasoline at the national level has dropped by 6.9 percent which is surprising for the summer season. This is the largest drop in the national average price over the same period since 2005. It was only surpassed by the 8.3 percent fall in 2007 over the same period.
U.S. gasoline demand has averaged 9.405 m/bd so far this year, which is a 3.7 percent increase, according to the U.S. Energy Information (EIA). But over the last four weeks of this driving season, the gasoline demand growth is only 1.3 percent over the same four weeks of last summer. This means gasoline demand for this summer is not much higher than the corresponding demand for last summer.
This is surprising because the vehicle miles traveled a year over a year has grown by 3.1 percent according to EIA. If one views the EIA graphs of gasoline demand over the last few years, they can see that the demand for 2016 is converging with that for 2015.
What does all of this mean from the demand side? The gasoline demand for this summer is not much different from that of 2015 despite the increase in the VMT, which did not go well for gasoline prices.
The U.S. gasoline supply for this year has behaved differently from its demand counterpart. Gasoline supply has exceeded demand for the last several years. Recently, there were periods such as September 2015 and January, February and June 2016, where gasoline supply came very close to demand. However, since March 2016 the gap has been widening, showing a solid gasoline glut over demand. Currently, there is a major backup of gasoline tankers at New York harbor, due to the gasoline storage being full; to the point that the tankers are being diverted to other places including Florida and the U.S. Gulf Coast to unload.
Moreover, the United States has been a net importer of gasoline in recent months, adding to the domestic gasoline production.
That said, what does all this say about future gasoline prices? As the summer season winds down, the gasoline glut will rise further and the downward pressure on gasoline prices will intensify, sending those prices much lower than their current levels even if refiners cut production runs. This should in turn be reflected in crude oil prices which may head down into the 30-ish range. The gasoline roller-coaster will keep moving!