Fuel Changes Ahead
By Samantha Oller on Nov. 12, 2016SCOTTSDALE, Ariz. -- It’s amazing how much change can happen in 12 years. Case in point: In 2004, gasoline prices averaged lower than in 2016, and it also happened to be the year that the president-elect’s trademark show, "The Apprentice," debuted.
As Tom Kloza, global head of energy analysis for the Oil Price Information Service (OPIS), Gaithersburg, Md., told attendees of the closing general session at Outlook Conference 2016, dramatic change is certainly possible, especially when it comes to the oil market.
With the stunning results of the recent presidential election as a backdrop, Kloza shared thoughts on what might shape oil and gasoline prices in the year to come ...
Beware of bad data
Before sharing his projections on oil, Kloza warned attendees to approach any energy data with caution.
“The way big data failed in the election and predicting what was going to happen in this election is very similar to the way big data and all the big numbers haven't seen what’s happened to oil in the last two to three years, let alone the last 12 years,” said Kloza. “And it's really because of the data integrity.”
For example, Kloza pointed to data from the Energy Information Administration (EIA) suggesting that gasoline demand had risen anywhere from 4% to 6% in 2016, which may have led some retailers with flat or slight growth to wonder what they were doing wrong. EIA eventually revised these figures down 1.75%.
But refiners, encouraged by the initial positive growth numbers, increased production of gasoline—and, ultimately, by too much, resulting in thinner margins.
The persistant oil glut
What happens to oil prices in the next six to 12 months depends in large part on decisions made by oil producers in West Texas, Moscow and other key regions, said Kloza. The Saudis would have to cut their own oil production by 800,000 bpd to build prices to the $55 to $60 range.
IHS, the parent company of OPIS, forecasts oil prices to average $52 per barrel in 2017 and $57 in 2018.
Global demand should exceed supply by about 200,000 bpd next year, and maybe in 2018 as well. “So the glut doesn’t really disappear—we don’t add to it that much, but it doesn’t disappear,” said Kloza.
Shale oil rebounds
For retailers with stations in West Texas, North Dakota and other shale-oil producing regions, Kloza said the economies should begin turning around as oil producers undergo massive cost restructuring. In fact, three out of five companies can see a rate of return with $35- to $40-per-barrel crude.
“The shale business is going to rise again, guaranteed,” he said.
Diesel still has its mojo
Despite the issues with the Volkswagen emissions cheating scandal, Kloza thinks diesel “still has its mojo.”
“Diesel’s mini renaissance will come with infrastructure,” he said, citing suggestions from the incoming Trump administration to increase infrastructure spending, which has not happened at the federal level since the 1970s.
A high-octane future
Even assuming that the Trump administration attempts to roll back some of the Corporate Average Fuel Economy (CAFE) standards that the Obama administration ratcheted up, “he can only do so much,” said Kloza. That’s because automakers have already been designing, manufacturing and introducing vehicles with highly efficient, turbocharged engines that run on high-octane fuel.
“The big battle over the next few years is for octane,” said Kloza. Octane will prove to be an issue between ethanol and refining interests, battling over the best, most cost-effective way to increase octane in fuel, he said.