While an enormous supply growth from the U.S., compounded by a massive competitive surge from OPEC, have been primary culprits behind the oil-price collapse little attention has been given to the demand side of the equation.

In fact, market observers believe that stronger-than-expected global oil demand growth is considered to be the most underappreciated and most important driver for bullish outlooks from 2017 to 2018. 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 rebalancing of global crude markets by mid-2016 and supports an eventual recovery in oil prices,” analysts at Raymond James & Associates Inc. observed in a note to clients recently.

The analysts suggest that U.S. oil demand is actually more important than ever, with the U.S. accounting for an impressive 20% of total global oil demand. 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 million barrels per day (bbl/d) in 2014), 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-bbl/d upswing in oil demand growth relative to the last decade average,” according to the analysts.

“While we expect modestly higher oil prices next year, we see 2016 U.S. oil demand growth at a slower pace but still healthy relative to the negative average annual growth posted over the past decade,” the analysts continued.

“While not as robust as the price drop-aided growth in 2015, our initial forecast for U.S. demand to be up 1.5% (around 300,000 bbl/d) in 2016 will still be a material positive driver to balance the global oil supply/demand equation next year.

“More specifically, we foresee continued gains in gasoline demand in 2016 (up 1.5%, or 150,000 bbl/d), along with solid improvement in middle distillate demand, with jet fuel likely to continue its 2015 gains (~+5%) and diesel demand likely to rebound from depressed 2015 levels as the comps from a collapse in the rig count get lapped for the full year,” the Raymond James analysts noted.

Why the gasoline uptick?

Clearly, the price of gasoline at the pump is the most obvious variable explaining short-term changes in gasoline demand, according to Raymond James, with the historical relationship between gasoline prices and gasoline demand being fairly strong.

“Obviously the U.S. gasoline consumer is relatively price elastic. Since average pump prices have been 29% lower this year than in 2014, we are not surprised to see that U.S. gasoline demand could be up by as much as 3.5% [in 2015 over 2014],” the analysts said.

While changing prices are the most important gasoline demand variable, there are others that are also relevant. For example, even though gasoline prices collapsed in 2009, demand also fell due to the Great Recession.

When looking out into 2016 and beyond, Raymond James and other market analysts will also be watching unemployment trends, vehicle miles traveled (VMT) trends and vehicle sales trends to provide modest tailwinds for further growth in U.S. gasoline demand in the U.S. Offsetting these positive pressures will be modestly higher gasoline prices in 2017, along with improved efficiency and demographic trends acting as natural headwinds on the margin.

Encouraging VMT, vehicle sales trends

Apart from gasoline prices and unemployment trends, VMT and vehicle sales trends also show clear positive correlations to gasoline demand (and employment trends) as well, according to Raymond James.

While VMT has been a relative drag on gasoline demand since the Great Recession, with total miles traveled below the 2007 peak from 2008 to 2014, the landscape as of late, along with expectations for 2016, is much improved.

September 2015 VMTs in the U.S. were 259.9 billion, up 4.3% from September 2014, representing the highest year-over-year gain since January 2015, according to recent U.S. Department of Transportation data. For the first nine months of 2015, VMTs were up 3.5% vs. 2014.

“We think the data continues to be strongly supportive of a meaningful gasoline demand response to lower prices in the U.S., and suggests that a relatively weak +2.3% figure in August 2015 did not indicate a stalling trend,” Brad Heffern, analyst for RBC Capital Markets LLC, said in a note to clients recently.

“We would also note that early September generally represents the end of driving season in the U.S., so the monthly data should have been pulled down somewhat by less vacation driving. While VMT growth will likely outpace gasoline demand growth because of improving fleet efficiency, we think the data is easily supportive of an underlying 3%+ demand response. This is a positive for the U.S. refining group as a whole, in our view,” Heffern noted.

While seasonal driving patterns influenced by cheap gasoline prices may be a positive indication of demand, the Raymond James analysts contend that U.S. vehicle sales are looking strong as well, particularly in the less fuel efficient light-duty truck category.

“New vehicle sales in 2015 are on track to have the best year in more than a decade, with seasonally adjusted vehicle sales up ~6% through October over 2014 levels,” according to the Raymond James analysts.

“More importantly, growth in light truck sales (January to October) is up ~13% year-on-year, by far outstripping modestly lagging passenger car sales (down 1.6% year-on-year). By contrast, hybrid sales were down 16% year-on-year, and electric vehicle (EV) sales were down 7% year-on-year, which means that 2015 is tracking to be the first-ever down year for EVs,” the analysts further noted.

Bryan Sims can be reached at bsims@hartenergy.com