Thanks to the U.S. shale oil boom and continued growth in Canadian oil sands, one might call the United States the Insulation Nation. U.S. crude production has advanced to its highest level since 1989, and imports of all foreign crude look to continue to drift lower. U.S. crude imports in late 2013 were as much as 4-million barrels per day below some of the levels witnessed in 2010. North American production increases in recent years have more than made up for the loss of Libyan crude, or world barrels lost to Iranian sanctions. Crude oil costs never saw a super-spike in 2013, despite the convergence of global disruptions that removed more than 3-million barrels of supply for a brief period last summer. With the shale oil boom just hitting its stride, the United States has heavy layers of insulation that should protect it from price spikes that could impact other continents. Discounts for U.S. oil in 2013 varied from just a few dollars per barrel to more than $40 barrel (for Canadian sour crude) and discounts to world prices should again be pervasive and highly variable in 2014.
Regional Gasoline Forecast
It was not uncommon to find a dollars’ worth of difference between street prices in different states throughout all of 2013, and that state-by-state diversity will continue and even broaden in 2014. Many of the differences are attributable to tax treatment, but incredibly variable crude costs and wholesale gasoline prices accentuate the diversity.
Hawaii stands alone as the single U.S. state that moves according to specific global metrics, and it is the only state where GasBuddy projects a $4 gal or higher 2014 average. Fourteen states spent some time with statewide averages above $4 gal at some point in 2013, but we suspect that such moves will be rare or extraordinary in 2014. Seventeen state averages bottomed out below $3 gal in 2013, and we suspect that such trips to low latitude will be a much more regular occurrence next year. Note: Two states (Minnesota and Nebraska) had the unusual distinction in 2013 of achieving averages above $4 gal and below $3 gal.
While 2014 should deliver a more temperate gasoline price background than 2011, 2012, and 2013, we see the potential for dramatic price spikes and equally dramatic price plunges (See maps). California, for example, will spend some time near the end of the first quarter above $4 gal. Illinois, and to a lesser extent some of the adjacent Great Lakes’ states, could face a price spike tied to refinery issues that would bring some of the metropolitan areas some 50-75cts gal above year-end 2013 numbers. But the interior of the country (a beneficiary of the most discounted crude oil on the planet) should largely have the greatest insulation against super-spikes. Motorists traveling in the Great Lakes, Great Plains, and Rocky Mountain states are among those most likely to see pricing points not documented since 2010.
Spring Spike To Return Again
The likelihood of a late first quarter 2014 rally in prices from winter lows remains quite high. Factors that contribute to a seasonal gasoline rally haven’t changed. February through April tends to see plenty of refinery maintenance ahead of the so-called driving season. Specifications for gasoline change in the second calendar quarter and cheaper components that are plentiful in the winter can’t be used during the warmer weather months. In a sense, refining is a bit like the television show “Cake Boss”: cheaper hydrocarbons (or metaphorical “flour”) can be used to manufacture gasoline in autumn and winter, but gasoline tends to be more gluten-free in spring and summer.
The greatest fundamental in oil markets is money, and big money tends to chase oil and gasoline prices higher as spring approaches.
The Northeast is a bit of a new hot spot. There is less North Atlantic refining than in previous years, and imports of gasoline continue to tail off thanks to poor economics in Europe and elsewhere. Super-storm Sandy gave a preview of the region’s vulnerability, and northeastern states now tend to be in the highest quintile of motor fuel pricing.
The Pacific Northwest, on the other hand, is a beneficiary of the U.S. shale boom. Much of the new North Dakota oil production gets moved to the Puget Sound where it is turned into gasoline and other products. Oregon prices for gasoline dipped below $3 gal late in 2013 and together with Washington, this geography may fare better than other regions.
The Gulf Coast and portions of the U.S. Southeast represent a mixed bag. U.S. Gulf Coast refining capacity has advanced to its highest levels on record, and by far represent the greatest cluster of output in the world. But exports of diesel and gasoline have grown steadily in the last three years, and the coast has generally escaped hurricane shutdowns since 2008. The good news is that without the intrusion of weather, Gulf Coast states from Texas through Virginia should see world class refineries supply some of the cheapest wholesale gasoline in the world. The worry is that an interruption in this world class refining system (whether through hurricane impacts or precautionary shutdowns) could lead to brief, but spectacular price spikes.
Florida and some southeastern coastal areas like Savannah, GA and Charleston, SC warrant special attention. Florida is less than 1,000 miles from many Gulf Coast refineries but shipping rates for moving gasoline from Texas or Louisiana to the Sunshine State are four and five times the rates before the shale oil revolution. Many of the barges and tankers traditionally used to ferry gasoline from refineries to Gulf Coast and southeastern ports are now required to move crude. We would not be surprised to see interior counties in the Carolinas, Georgia, and Virginia feature prices that are 10cts gal lower than coastal areas.
Consumer Demand and Behavior
Optimists looking at the U.S. economy will no doubt claim that cheaper gasoline prices are inspiring some behavioral changes among drivers. Most of the rhetoric tends to be subjective cheerleading and is based more on hope than on statistical observation.
The final numbers for U.S. gasoline consumption won’t be delivered by the Energy Information Administration until February, but 2013 may indeed have seen a small rise in demand, which would be the first annual increase since the peak demand year of 2007. For perspective, gasoline demand averaged 390-million gallons per day in 2007, compared to 365-million gallons in 2012.
Gasoline demand may continue to be extraordinarily lumpy. It was quite common to see consumption vary by nearly 1-million barrels per day (42-million gallons) when one compared winter and summer weeks of 2013. That pattern may persist in 2014.
However, a major increase in consumption is improbable in 2014. Demand faces considerable headwinds. U.S. drivers are aging and the fastest growing demographic group includes those over the age of 55, and represents people who will drive less and less. Tougher CAFÉ standards are also ingrained within vehicle requirements, particularly from 2016 forward.
It is clear that 2014 will continue to see gasoline reign as king of the transportation fuels. But watch for diesel to make some more inroads in mid-decade years. Research confirms as many as 40 new light-duty diesel-fueled vehicles will be introduced between now and the end of 2015. Despite higher street prices, diesel could see its market share of light duty vehicles increase to 3% or 4% in relatively short order.