The biggest oil and fuel market story of 2014 was the 30+ percent decline in global crude oil prices experienced in the second half of the year. West Texas Intermediate (WTI) spot prices fell from just under $110 to $74 per barrel—a level not seen since the global recession cut a whopping 6 percent from global consumption back in 2009. This price decline has come largely at the hands of surging U.S. oil production and the fact that global demand has lagged due to significant deceleration in the growth rate of Chinese demand.
Through the course of the year, domestic crude oil production grew by approximately 13.5 percent, or over 1 million barrels per day (bpd). By comparison, domestic consumption grew by only 80 thousand bpd, and Chinese consumption increased by just 230 thousand bpd.
On a net basis, the U.S. alone supplied nearly half of the crude oil needed to support the increase in global liquid fuels consumption. Another 750,000 bpd of supply came from Libya, where production remains more than half a million bpd below pre-uprising (2011) levels. Consequently, looking forward, there is room for further growth in both the U.S. and Libya in the months to come.
While gasoline prices have declined by more than 20 percent from summer highs, with the national average now just under $2.90 per gallon, the extreme softening of global oil prices has not translated to significant savings for most diesel consumers. The national average price for a gallon of diesel has only declined 9 percent from summer highs, and the strength of this decline was largely driven by pump prices in the Northeast falling from winter highs associated with the unusually severe weather that pushed up regional demand for heating oil and natural gas.
Outside of the Northeast, diesel price declines have been much more muted, ranging from just 5 percent in the Rocky Mountain region to 7 percent on the West Coast. While such savings are welcome, they land far short of the more than 30 percent decline in crude oil prices.
From a diesel perspective, the problem is that global distillate markets remain tight, especially relative to oil markets. While investments in refinery equipment continue to lift the yield of diesel per barrel of crude oil, diesel demand continues to grow apace. This pattern will persist at least through the first half of 2015 as the next round of MARPOL Annex VI sulfur regulations will be brought into force in January.
These regulations will force ships operating in emissions control areas (ECAs) to switch from heavy fuel oil to low sulfur distillate fuel. Rough calculations suggest that if all vessel operators adhere to Annex VI requirements, global distillate demand could rise an additional 3 percent, thus making it that much harder for refineries to adjust output to match the shift in demand.
Last year, average weekly natural gas spot prices experienced a significant jump as the Polar Vortex rolled through the Northeast, rising from $3.50 per mcf to over $6.50 over the course of the winter, but prices fell below $4.00 per mcf by July. Despite the low price, natural gas producers were able to rebuild storage inventories at a nearly unprecedented rate, which is good considering that by the end of the draw-down period, inventories had declined to 50 percent of the prior five-year cyclical low.
As of late November, levels are now approximately 9 percent below average as we head into the next draw-down cycle. While the low prices kept producers from increasing the number of active drilling rigs, and, in fact, the number of drilling rigs deployed on natural gas fields is 5 percent lower than a year ago and 80 percent below the peak level reached in October 2008, efficiency gains have proved to be stronger than many analysts had anticipated.
At the beginning of the year, I had anticipated that natural gas prices would rise above $5 per mcf, and while they did for a short period, as of mid-November the price is just $4.34 per mcf. Given that the market has most likely moved into the draw-down period, and the first snowstorm of the year has dumped three feet of snow in parts of New York, there is certainly still room for prices to rise along with demand and against storage levels. Even at $4.34, prices are $0.68 per mcf—or 18.5 percent—higher than year-ago levels.
With natural gas prices above $4.25 per mcf, CNG and LNG remain viable options for only a small portion of the U.S. trucking fleet. While significant opportunities still exist in conversion, at the current price differential, there is not a lot of incentive to be an “early adopter” of CNG or LNG technologies.
Looking to 2015, oil and fuel markets are likely to remain soft if not soften further, with diesel markets continuing to be the tightest market. It’s difficult to know the degree to which MARPOL Annex VI sulfur emissions regulations will impact distillate markets, but the threat of rising diesel prices persists even in the face of softening crude oil markets remains.
In the end, it looks like gasoline consumers will be the biggest beneficiaries of softening oil markets as diesel demand continues to outpace gasoline demand, and satisfying the global distillate market will result in a buyer’s market for gasoline. Of course, gas savings translate into higher retail sales, so there will be some indirect benefits for carriers even if diesel prices remain firm.