Automotive Fleet, July 2017

Conventional wisdom in the fleet market is often wrong If we roll back the calendar to 10 years ago the conventional wisdom about future fuel prices was that there would be ebbs and flows in price per gallon rates but the overall price trajectory would trend upward The flaw with conventional wisdom is that it only works when no new variables are inserted into future projections A case in point is the shale oil revolution which now has experts predicting oil prices will remain flat for the foreseeable future perhaps much longer than any of us anticipate Who predicted this 10 years ago This forecast of flat fuel prices has positive ramifications for the fleet industry as it will impact not only fuel prices but also the cost of replacement tires plastic based auto parts and tangentially even the types of vehicles offered on fleet selectors Growth of U S Shale Oil Production Currently global oil production exceeds global demand which is putting downward pressure on fuel prices What is contributing significantly to this glut in global oil inventory is the dramatic resurgence in shale oil production in the U S which has increased to 55 million barrels a day according to the U S Energy Information Administration EIA The EIA forecasts U S crude oil supply will grow almost 5 in calendar year 2017 and again in 2018 by nearly 8 The U S is on track to surpass Saudi Arabia as the No 1 oil exporting nation in the world Although ongoing economic growth in China and India will increase global fuel consumption to a record 100 million barrels per day in the second half of CY 2017 this increase in global demand is still below the growth in the global production of crude oil For comparison global consumption of oil in 2018 is forecast to increase by 14 million barrels per day however non OPEC production is set to increase by 15 million barrels a day Despite growing global consumption global production will continue to exceed demand This has a direct correlation to price Overall oil prices are down 17 since the start of CY 2017 and there is nothing on the horizon to indicate this will change in CY 2018 Todays supply demand dynamics for crude oil are not unique There is precedent for todays situation when the new production of North Sea oil ramped up in the late 1980s exerting downward pressure on oil prices This persisted for 20 years until the emergence of the Chinese economy The spectacular growth of the modern Chinese economy was the catalyst causing global demand for oil to exceed inventory which put upward pressure on fuel prices as demand exceeded supply But this equation changed when U S shale oil production ramped up In fact future oil prices will increasingly be influenced by the cost to produce U S shale oil and less so by OPEC The collapse of the oil shale industry in 2014 when Saudi Arabia depressed prices by substantially increasing production turned out to be a blessing in disguise When the price of oil fell below the cost to produce shale oil the U S industry was forced to cut costs by learning to extract oil with less gear and smaller work crews In addition there have been advances in fracking technology such as hydraulic fracturing closer to the wellbore versus the massive more expensive wide ranging fracks of the past Today U S producers are able to operate profitably at lower crude prices which promises to keep prices low since higher crude oil prices would only stimulate greater U S shale oil production In June Wells Fargo forecast that the price per barrel of crude oil will fluctuate between 30 and 60 in the coming years Likewise Goldman Sachs forecast oil prices will be 53 to 56 per barrel of crude oil depending on the index used Another example of surging shale production is that the total rig count in the U S increased to 741 rigs in June 2017 compared to 328 rigs one year earlier In 2017 the big integrated oil companies ExxonMobil Chevron and Royal Dutch Shell announced 10 billion in combined spending on U S shale projects The EIA now forecasts that U S crude oil production all oil production including shale oil will surpass 10 million barrels per day in CY 2018 a new record high The old record was set in 1970 at 963 million barrels per day Can the U S Join OPEC An interesting question is whether the U S would ever become a member of the Organization of Petroleum Exporting Countries OPEC but this is unlikely for a number of reasons First countries seeking membership in OPEC must have a substantial net export of crude oil and fundamentally similar interests to the current members To become a member of OPEC a country must receive approval from three quarters of the existing members and all of the founding members two of which are Iran and Venezuela which are currently not on the best of terms with the U S While the U S is indeed a major exporter of crude oil our national interests are not fundamentally similar to other OPEC countries Second the U S would have difficulty complying with OPEC rules which seeks to influence oil prices by how much each member produces annually There is no legal mechanism in the U S that allows the federal government to control domestic oil production In addition the U S has specific anti trust laws against collaboration by producers in the same industry to determine the minimum price of a commodity Where in the past Saudi Arabia was the swing producer that could influence the price of crude oil today the U S is emerging as the new swing producer that can influence the global price of oil based on our domestic production of shale oil Hopefully Im not a purveyor of new conventional wisdom by making this assertion Let me know what you think AF mike antich@ bobit com Forecast is for Fuel Prices to Remain Low for the Foreseeable Future AUTOMOTIVE FLEET I JULY 2017 8 MARKET TRENDS BY MIKE ANTICH