The ability of the U.S. fuels market to respond to lower oil prices is expected to be capped over the long-term due to fuel market regulations meant to limit domestic demand for conventional refined fuels, according to Fitch Ratings.
These measures include rising renewable fuel requirements under the Energy Independence and Security Act (EISA) of 2007, which mandate the use of increasing amount of renewable fuel sales through 2022; higher Corporate Average Fuel Economy standards, which will gradually raise the fuel efficiency of the US passenger cars and light trucks to 2025 regardless of fuel price; and the regulation of greenhouse gases at both the state and federal level, which is expected to add costs for refined domestic refined product, particularly gasoline.
The dramatic decline in North American oil prices has led to sharply lower prices at the pump, and has begun to result in increased demand in the US. WTI fell approximately 45 per cent in USD terms, from $107/barrel this past summer to less than $55/barrel at the beginning of the new year. According to the Energy Information Administration, total weekly gasoline consumption as of the end of December rose above its five-year high and stood at approximately 9.5 million bpd, up about 3.3 per cent above the five-year high range and about 3.7 per cent above year-earlier levels.
The limited ability of the US to rebalance global oil markets through changes in demand suggests that the oil market will likely require a more significant adjustment on the supply side to recover from its recent lows. This dovetails with Fitch’s view that the recent drop in oil prices is mostly a supply-driven issue that will require a significant supply response to come back into balance.
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