On Wednesday, the U.S. Energy Information Administration (“EIA”) released the latest Weekly Petroleum Status Report:

Total Stocks, including the Strategic Petroleum Reserve (“SPR”), were relatively unchanged and decreased by just below one million barrels to 1.942 billion barrels or 33 million barrels above the level exactly one year ago.

Domestic Production dropped week-over-week by 100,000 barrels per day to 12.4 million barrels per day, in line with my prediction in Oil Prices To Rise that Domestic Production growth would remain muted through year end:

Petroleum Supply, Week Ending 9/27/2019

Indicatively, the U.S. oil rig count continued to decline in the last week by three in the week to Oct. 4, bringing the total count down to 710, the lowest since May 2017. Reuters noted:

The oil rig count, an early indicator of future output, has declined over a record 10 months as independent exploration and production companies cut spending on new drilling as they focus more on earnings growth instead of increased output.

In other words, Domestic Production may have peaked, at least for now.

Flip Side

The following graph presents the Crude Oil Input to Refineries in the last year:

ChartData by YCharts

As I have pointed out in previous articles throughout 2019, this figure has been declining year-over-year for some time, and no one seems to be able to explain the reasons while expecting it to turn up.

The most recent release showed that Crude Oil Input to Refineries dropped by 3.5 percent from the same week last year, and the four-week average dropped by 2.4 percent from the same period last year, both representing a significant acceleration from the 1.6 percent year-over-year drop in the year-to-date period.

One reason could be that the U.S. gasoline consumption is accelerating downward, as Mason Hamilton, the U.S. EIA Senior Petroleum Markets Analyst, illustrates:

The consistency of the downward trend of the three-month moving average is striking, and for those who believe that this is due to the slowing domestic GDP growth, the following graph presents the U.S. GDP growth since 2014:

ChartData by YCharts

The U.S. Real GDP Growth rate has been relatively consistent in recent years with only small variations around the 2 percent level, so an imaginary slow down in the domestic growth rate is not the explanation for declining gasoline demand in the United States.

Further, the U.S. Monthly Total Vehicle Miles Traveled have been increasing, so the reason is not that Americans are driving less either:

ChartData by YCharts

What really is causing the accelerating decline in domestic gasoline demand?

Electric Vehicles

The above discussion leaves one possible answer: Electric vehicles.

Millions of hybrid and all-electric vehicles are being added to the global vehicle fleet every year, and I expect this rate to grow in the future. The number of electric vehicles added to the U.S. fleet today approximates 10,000 per week.

I estimate that electric vehicles could be more than offsetting gasoline demand increase from the growing U.S. vehicle fleet, and therefore, explain the 100,000 to 150,000 barrels per day year-over-year declines in domestic demand for gasoline. I expect this trend to grow in 2020 and beyond.

Bottom Line

Energy investors should not underestimate the impact of growing electric vehicle sales on gasoline demand, especially in advanced economies.

Going forward, the question for energy investors could be “Will the global oil supply decline quicker or slower than the global oil demand?”

If you’re interested in my investment methodology and other holdings, join Value Portfolio. I’m confident that you will find my fundamental research to be insightful, and I look forward to discussing ideas with you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source link

2019-10-05