Energy Prospectus

Raymond James Energy Stat of the Week (November 16, 2015):

Energy Stat: U.S. Gasoline Demand Set to Play Prominent Role in Global Crude Rebalancing Equation
Earlier this year, we highlighted the fact that, over the past two decades, the U.S. has been a relatively minor contributor to global
oil demand growth despite being the largest global oil consumer. With that said, at the same time, we suggested that U.S. demand
growth was poised to accelerate rapidly in 2015. The simple logic was that low oil prices would translate to lower U.S. gasoline
prices and spur highly elastic U.S. consumers to drive more and buy bigger cars. Explicitly, we supported the notion that U.S. gasoline
demand would surge a whopping 3% (or about 300,000 bpd) year-over-year in 2015. Put another way, the roughly 60% decline in oil
prices would “drive” the highest annual U.S. gasoline demand growth seen in decades. Following the theme of last week’s stat of
focusing on the non-U.S. oil demand side of the equation, in this report we will focus on the underappreciated U.S. oil demand
issues including: (1) compare and contrast how U.S. gasoline demand actually played out this year versus our prediction, (2) discuss
why this topic is more important than ever (and often overlooked), (3) touch on what effect we expect this to have on overall U.S.
crude demand, (4) address the fundamental drivers of this demand response here in the U.S., and (5) outline our thesis on U.S.
demand moving into 2016 and beyond.

So how close were we? In late January, we presented the notion that savings at the gasoline pump would lead to a surge in
domestic vehicle miles traveled and (in conjunction with a falling unemployment rate) would translate into much stronger gasoline
demand growth in 2015. Specifically, we thought U.S. gasoline demand would be up by as much as 3.0% (or about 300,000 bpd)
this year, reflecting what would be the biggest surge in gasoline demand that the U.S. has seen in over three decades. With the end
of the year approaching, it looks as there is a very real possibility that our expectation for growth of 3% y/y was, in fact, too
conservative. As shown below, our original 3% U.S. gasoline demand growth target currently stands in between the EIA’s monthly
and weekly datasets. According to the somewhat less reliable (but more up-to-date) weekly data (as of November 6th), our forecast
was way too low, with weekly U.S. gasoline demand currently averaging over 4% higher than last year. Turning to the typically
more accurate but less up-to-date monthly data (as of a revisable August datapoint), our forecast was modestly higher than the EIA
actual monthly demand growth of 2.7% y/y. Again, understand the two caveats to these datasets: while the monthly data is
typically viewed as more accurate, the current monthly data so far only captures about 60% of 2015 to date (vs 85% YTD for the
weekly data). Therefore, we remain confident in our original prediction of 3% year-over-year growth in gasoline demand in 2015.

Before we dive into the details, how important is U.S. oil demand, isn’t the oil problem really too much supply? Yes, the main
reason that oil prices have collapsed is enormous oil supply growth from the U.S. compounded by a massive competitive surge from
OPEC. It is not at all surprising that the majority of the questions we get about the global oil market are in relation to supply, with
little attention being given to the demand side of the equation. With that said, we believe that stronger than expected global oil
demand growth is the most underappreciated and most important driver of our bullish oil outlook for 2017/18. In particular,
massive U.S. oil demand growth (especially for gasoline) represents the biggest year over year move on the demand side. The
bottom line for energy investors is that a combination of modestly lower U.S. oil supply growth coupled with a huge surge in U.S. oil
demand has set the stage for a re-balancing of global crude markets by mid 2016 and supports an eventual recovery in oil prices.

U.S. oil demand is actually more important than ever. As shown below, the U.S. accounts for an impressive 20% of total global oil
demand (below left). While the U.S. represents a massive one-fifth of total global oil consumption, demand has actually DECLINED
by nearly 1% annually over the past decade. Since gasoline represents about half of U.S. oil consumption (or about 9.0 MMBpd in
2014 –below right), a 3% surge in U.S. gasoline represents a BIG change to global oil demand growth factors. Specifically, U.S.
gasoline demand growth in 2015 represents about a 400,000 bpd upswing in oil demand growth relative to the last decade average

What about total U.S. petroleum demand? It is important to remember that gasoline only represents about half of U.S. petroleum
consumption. The “other” half is mostly diesel fuel (trucking), jet fuel, and other distillates. In an effort to be conservative, we have
assumed this “other” category would only post a modest 1.8% annual growth in 2015 for a total 2015 U.S. petroleum demand
growth of about 2.3%. Remember, annual total U.S. petroleum products demand growth has averaged a negative 0.9% per year
over the past decade. Like gasoline demand, the U.S. has two total petroleum demand datasets to confirm our estimates (weekly
and monthly-- both provided by the EIA). According to the weekly data (as of November 6th), total petroleum product demand has
averaged a whopping ~3.5% more than last year, while the monthly data (as of August) suggests a still robust growth of 2.6% y/y.
Both of these are meaningfully higher than our estimates. Once again, given that the monthly data is more accurate (albeit less up
to date), we believe a level somewhere in between is an appropriate estimation, implying that crude demand could be up by as
much as 3% in 2015. Not only would this be the fastest growth rate since the 2004, but this corresponds to nearly 600,000 per day
of incremental U.S crude demand growth (vs a negative 90,000 bpd annual average over the past decade).