Another Record in Store for 2016

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Oil & Gas

I’m heading back into the mountains this summer to the small town I lived in as a kid. And by small, I mean tiny. The area doesn’t even have census data. And the “big town” nearby has a population of just 651.

Every couple of years, my siblings and I head there. It’s funny, because the drive from Maryland over the years has gotten shorter and shorter. New roads and highways have cut the travel time nearly in half from what it was a decade ago.

But our summer trip is just part of the travel blitz the U.S. sees. We’re heading into the time of year when Americans take to the roads.

Family vacations, outings to the beach and the mountains, camping trips… These are the outdoor activities we embrace during the summer months. And more often than not, Americans travel by car.

It’s a vital trend.

Each winter, U.S. refineries enter into maintenance season to prepare for the upcoming “summer driving season,” which typically begins Memorial Day weekend. I’ve written several times here over the last few months about refinery utilization and the short-term effect it has on crude prices.
Refinery_Utilization_Rates_1985-Feb2016During that maintenance period, as refineries require less and less crude, the price of oil typically dips… and propels any move lower faster – as we saw this year when crude bottomed in February.

That means we generally see a shift of more than a million barrels per day in refinery demand from peak (July) to trough (February).

Savvy investors should pay attention to the trend. We’re watching it unfold right now.

In fact, just this past week, the U.S. refinery utilization rate increased to 89.1%. Refinery inputs increased to 16.2 million bpd. And gasoline production increased to 10.1 million bpd. That’s an increase of more than 5% year over year.

All of this is in anticipation of what will be a record-breaking 2016 summer driving season. American motorists have already rebounded from the lulls we saw over the last several years and are setting new all-time highs in total miles logged…
12-Month_Total_Vehicle_Miles_TraveledAt the start of the year, the Energy Information Administration said U.S. gasoline consumption would not hit a record this year. But it’s changed its tune with each new set of data. It is continually revising its projections upward for American gasoline consumption this summer.

For psychological levels, this is important since the current record for the summer driving season was set in 2007… right before the financial crisis. So it’s been a long, slow slog of a recovery.

During the 2007 summer driving season, U.S. motorists consumed 9.29 million bpd in gasoline. Last year, motorists got close… They consumed 9.16 million bpd.

We were just shy of record gasoline consumption last summer.

But there was a lot of negativity to start 2016, and many people believed we wouldn’t top the 2007 record. In fact, at the end of February, the EIA commented that despite increased travel, 2016 would remain below the 2007 level.

Of course, over the last couple of months, it’s done an about-face. And the reasons are pretty clear…

In March, Americans consumed 9.25 million bpd in gasoline – the highest level ever for that month. The figure then rose to 9.39 million bpd in April.

All of this data indicates a few more solid months for crude.

It’s even worth remembering that the only stretch of months when WTI posted gains last year was from March to June – the end of refinery maintenance season and the start of the summer driving season. Again, it’s a powerful trend.

There are a couple of basic rules in commodities trading. One of those is don’t go short crude before the summer driving season… especially when demand is expected to be high. In April, we saw net long positions in crude surge to an 11-month high (the previous high was set in May 2015), while short positions plunged.

Crude likely won’t be under attack this summer. Consumption of gasoline is on the rise, and prices will increase in kind. We’ll have some stability – at least for the next couple of months – as there are few reasons for declines…

So, as an investor, you can hit the roads with confidence.

Good investing,

Matthew