If there's one thing on the mind of oil companies and their investors, it's the current weak price of oil. That's just what happens when the commodity's price is unexpectedly cut in half after a glut of oil developed last year when abundant supplies were met with lukewarm demand. To fix the oversupply problem and boost oil prices, oil companies have been cutting back on spending money to drill new wells. This will eventually lead to a reduction in supply, but this takes time, as oil companies really can't afford to simply shut down already-producing wells.
There is, however, another way to engineer a rebound in the oil price, and that's to see some improvement in demand for petroleum products. This past week, the industry got a key sign that demand for these petroleum products is indeed starting to improve. That sign came when the U.S. Energy Information Administration released its latest data for petroleum inventories, which included a huge drawdown of gasoline supplies. This suggests demand for gasoline is really starting to pick up, meaning the gap between oil supply and demand could begin to tighten, leading to a higher future oil price.
Drilling down into the numbers
While the EIA's data did show that oil supplies continue to pile up in storage, the data also showed that 4.3 million barrels of gasoline were removed from storage. That was well above expectations, as analysts thought less than a million barrels of gasoline would be drawn down from storage while it was also more than double last week's drawdown in gasoline supplies. It is data that suggests demand for gasoline in America is growing, as cheap gas prices incentivize drivers to hit the open road.
Overall, gasoline demand is up 2% from the same period as last year. That's certainly in response to lower gas prices, but that demand increase is also being driven by the fact that more Americans have jobs this year. The unemployment rate has steadily fallen over the past year and was down to 5.5% in February, after being over 6% at the same point last year. In fact, over the past year, the number of unemployed Americans has fallen by 1.7 million, and with so many more Americans now employed, they not only are commuting to work each day, but they also have some extra spending money to take a vacation or go shopping.
Summer driving season awaits
With gasoline demand already higher than last year, it suggests demand could be even more robust for this year's summer driving season. That's the period from Memorial Day through Labor Day, when more Americans hit the road for vacations and other trips than during the winter months. This typically leads to increased gas prices, as more motorists are competing for the available gasoline and driving up demand.
This year, however, gasoline prices are expected to be tame at least to start the summer season thanks to weaker oil prices. Those tame prices could be all the incentive Americans need to adjust their summer plans and take a road trip, or simply drive more often than last year. The unintended consequence of this surge in demand could lead to higher oil prices by the end of the summer, as more oil could be needed to be turned into gasoline to meet this uptick in demand. It's a trend that could help ease the glut of oil on the marketplace, and fuel a rally in oil prices later this year.
The low oil price over the past few months is starting to noticeably fuel demand for gasoline, as evidenced by the unexpectedly large drawdown in gasoline inventories this past week. This suggests demand for gas could be even more robust this summer as more Americans hit the road for vacation because of a stronger economy and lower unemployment. These trends, along with a slowdown in oil production growth by oil companies, could actually lead to a meaningful rally in oil prices later this year.