Volkswagen AG VLKAY has been in the eye of a storm since the Environmental Protection Agency (EPA) revealed last month that the company had cheated to comply with U.S emission norms.
The Volkswagen Emissions Scandal
The world's largest automaker by sales admitted that its diesel vehicles are installed with software, which switches on pollution controls during emission tests but turns them off while the vehicle is on road. Almost 11 million vehicles around the world – including Jetta, Beetle, Audi A3 and Golf from model years 2009–2015 and Passat of model years 2014 and 2015 – are fitted with this software.
Volkswagen has repeatedly apologized for this issue and promised that it will undertake measures to solve the problem. However, the month-old scandal has wiped billions off the company’s market value and accounted for the resignation of its chief executive, Martin Winterkorn.
Can Das Auto Prop Up Oil Demand?
Every cloud has a silver lining, and this might be no exception.
According to U.S. Energy Information Administration (EIA) administrator Adam Sieminski, the scandal involving Volkswagen’s diesel engine testing might increase the global demand for crude oil on the back of higher gasoline consumption. As more light automobiles switch from diesel to gasoline in the wake of the emission fiasco, crude demand is expected to get a fillip with more oil being needed to process gasoline.
As it is, the collapse in crude has markedly reduced the average price of U.S. gasoline, the most widely used petroleum product. Expectedly, this has led to increased consumption. EIA data suggests that domestic gasoline demand rose 3% year over year in the first six months of 2015 and is on track to grow by 2.3% (or 210,000 barrels a day) for the full year.
A further boost in demand from the Volkswagen scandal will drive gasoline consumption even higher, and consequently, things may look up for crude as well.
Demand Growth will Help Price Recovery
Oil has been dead money over the last year and half. In June 2014, West Texas Intermediate (WTI) crude futures were trading above $110 per barrel. Now it’s around $45 per barrel.
As is now widely recognized, the main culprit behind the plunge is a classic case of supply-demand mismatch. Surplus production remains an issue, particularly with the boom in American shale output. At the same time, weak global consumption is set to continue in the short- to medium term, thanks to Japan, Europe and now China.
Therefore, any development, large or small, toward increasing oil demand is a positive step for the beleaguered commodity. While all crude-focused stocks stand to benefit from recovering oil prices, companies in the exploration and production sector – like Cobalt International Energy Inc. CIE, Bonanza Creek Energy Inc. BCEI, Diamondback Energy Inc. FANG, Sanchez Energy Corp. SN and Linn Energy LLC LINE – are the best placed, as they will be able to extract more value for their products.
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