Americans are guzzling gasoline like crazy. Oil prices spiked as gasoline demand spiked after the Energy Information Administration (EIA) reported that gasoline demand is running at 9.3 million barrels a day, over 7% higher than we were a year ago. That led to a 4.5-million-barrel drop in gasoline supply, which was the biggest weekly drawdown in over two years.
Already retail prices are responding to the spike as AAA reports that prices at the pump increased 2 cents overnight $184.4 a gallon. RBOB futures surged, closing 8.27 cents higher at $1.4705 per gallon signaling the we most likely will see higher prices soon. The fallout also led ethanol prices higher despite ample supply. The Energy Information Administration did revise slightly higher its forecast for ethanol production for this year while maintaining its previous outlook for demand. But if this rate of gas demand continues, they may have to raise those demand figures.
Oil prices are also looking at the fact that production is going to inevitably fall. There are more cap cuts from big oil companies and more talk of Saudi Arabia looking to banks to borrow billions. Not only is Opec and non-Opec working towards an agreement to freeze production, we are seeing early signs that production is now falling.
The Energy Information Administration reported that U.S. monthly crude oil production in December, 2015 continued to decline, as oil production reached its lowest level since November, 2014. Production also declined from year-ago levels for the first time in more than four years. This continued production decline is the result of lower crude prices, which have declined more than 70% since the summer of 2014. The IEA says that crude oil production in December 2015 averaged 9.3 million barrels per day (b/d), down 166,000 b/d from December 2014 and the first year-over-year decline in U.S. monthly oil output since September 2011.
Domestic oil production has generally declined month to month since reaching a 44-year peak of almost 9.7 million b/d in April, 2015. Even as production declined, output was still above levels from the same month a year earlier until EIA published production for December, 2015.
Most of the decline in oil production has occurred in states where a large portion of output comes from tight oil formations, including North Dakota, Texas, and New Mexico. Oil production from tight formations accounted for most of the increase in U.S. oil production during the past five years, and it is now making up most of the decline in other areas.
We have been saying we are in the depths of the bust cycle. Look for the market to respond as we are in the process of putting in what could be a multi-year bottom.