2020: Shut-ins - Crude inventory builds again

Crude storage levels rise as Saudi crude hits shores

Commercial crude stocks rose due to temporary factors – namely, the unloading of Saudi crude tankers. A disastrous storage max-out does appear less probable, demand for finished products remained soft, as gasoline demand rose only slightly while diesel consumption fell. Jet fuel demand showed more signs of life, although not anywhere near pre-pandemic levels. As expected, diesel inventories continued to rise: stocks are already 9% above their 5-year highs and will likely rise even further. Gasoline stocks were flat but remain about 6% above their 5-year highs. As we’ve noted for several weeks, a growing glut of diesel inventories could weigh on refinery operations and lead to diverging outcomes in gasoline and distillate markets. If gasoline demand picks up, refineries will have to respond by also ramping diesel production even as distillates and jet demand is flat. The net effect could lead to an unprecedented expansion of diesel inventories.

Crude output continued its downward trend in the latest EIA data. With OPEC considering extending production cuts to the end of the year, we think that the more competitive U.S. upstream producers will be tempted to increase volumes as the market begins to stabilize or acquire competitors, potentially accelerating the U.S. oil industry’s next wave of consolidation.

Crude storage draws in Cushing

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve (SPR), totaled about 534.4 million barrels for the week ending May 22^nd, up by about 8 million barrels from the prior week. According to the U.S. Energy Information Administration (EIA), the SPR received injections of 2.1 million barrels for the second consecutive week, as total U.S. crude stocks rose by about 10 million barrels.

Inventories at Cushing fell again last week, for the third week in a row. Capacity utilization at Cushing stood at 68% from the week ending May 22nd, down from 83% three weeks ago. Cushing stocks reported ~25 million barrels of spare capacity for the week ending May 22nd.

Commercial stocks in PADD 3 (the Gulf Coast) rose by over 10 million barrels to about 295 million barrels. That’s likely due, in large part, to Saudi crude tankers unloading in the Gulf Coast (more on that in a moment). PADD 3’s reported storage capacity utilization stands at 64%, up from 46% in early January. Some intraregional storage markets could face commercial and/or physical constraints.

Why are PADD 3 stocks rising even as Cushing draws down? Saudi crude tankers offloading explains much of PADD 3’s recent build, but other factors are important. The nature of the COVID crisis (and the unpredictability of lockdown locations and duration) incentivizes optionality and waterborne transport, which increases PADD 3’s storage competitiveness. While Cushing is very well integrated, pipeline-borne crude do not enjoy the flexibility of waterborne crude, which could be why Cushing stocks are falling even as Gulf Coast inventories rise.

Additionally, some crude is heading to the Gulf Coast simply because new storage facilities are coming online. Corpus Christi is adding 17 million barrels of additional storage by August, just in time for the new “King of U.S. Crude Oil Exports”; Moda Midstream also recently completed a 10 million barrel storage project in the south Texas port. Other players in the Gulf Coast crude complex have also expanded their storage capacity offerings. Although the EIA is showing PADD 3 storage utilization levels at 65%, its working storage capacity levels may be somewhat dated because of the frantic storage build-out over the past two months. PADD 3’s true storage capacity utilization level may be closer to 60%. Corpus Christi reports its storage is only at 65% of capacity – and we expect Corpus storage utilization levels to be higher than PADD 3’s average given its geographical and export optionality advantages.

Imports and exports: Saudi crude flotilla arrives; exports flat Crude imports surged for the week ending May 22nd by 2 MMBPD, to 7.2 MMBPD, as Saudi shipments hit the United States. It appears that 11 of the 16 Saudi VLCCs have completed discharges, nearly all in PADD 3. The tankers discharged 12.4 million barrels at Louisiana’s VLCC-capable LOOP terminal alone. Since there is a lag to EIA reported data, import data for future weeks could also run at similar levels. Crude exports were flat and compressed Brent-WTI spread do not bode well for future exports.

Refineries and gasoline: stasis, the new normal?

Refinery inputs of crude oil rose slightly by ~0.1 million barrels per day (MMBPD) last week to 13.0 MMBPD as crude runs remain well below 5-year averages.

Product market demand remained weak, disincentivizing refineries from increasing inputs. Gasoline supplied for the week ending May 22nd rose by 0.5 MMBPD to 7.3 MMBPD, up sharply from 5.1 MMBPD in early April but still well below historical averages. Mobility data is somewhat bullish for gasoline demand, but consumers appear cautious about resuming normal driving habits amid a global pandemic. Driving data from the Memorial Day weekend, available in next week’s data release, could offer important hints about the shape of consumer demand during the summer driving season. We expect driving demand to remain below historical levels until the public health crisis is significantly ameliorated.

Gasoline Inventories fell slightly last week to about 255 million barrels but remain well above 5-year highs on soft gasoline demand. Nevertheless, the EIA’s gasoline days of supply on-hand estimate fell to 36.3 days from 38.3 days, possibly due to higher expected demand from summer driving.

Diesel stocks rose further while jet fuel demand continued its slow and cautious recovery. Jet fuel demand rose to 0.86 MMBPD last week, up 244% from lows seen earlier in the month; volumes are still down about 60% from year-ago levels, however. TSA passenger throughput data shows week-over-week increases in passenger demand, as the Memorial Day holiday saw a mini-surge in air travelers. We expect jet fuel consumption to continue to recover as consumers resume quasi-discretionary air travel, but demand will not fully recover for months, probably years. Jet fuel inventories were down only slightly as refineries have sharply reduced jet fuel output. Falling jet fuel production has produced a concomitant surge in diesel inventories.

Hopes that low diesel prices could stir demand are fading as U.S. diesel consumption fell again, with diesel demand falling by 0.4 MMBPD to 3.27 MMBPD. With consumption down over 24% year-over-year, diesel supplied remains well below 5-year lows. Moreover, diesel inventories have risen 30% since March, to over 164 million barrels; builds show no signs of decelerating. As we noted previously, refineries will have to increase their production share of gasoline and distillates if jet fuel demand does not recover. Diesel stocks will likely continue their torrid and possibly unsustainable growth this summer.

Production cuts continued…

For the week ending May 22nd, the EIA estimates production fell by about 0.1 MMBPD, to 11.4 MMBPD. The EIA estimates volumes are down by ~1.7 MMBPD from late February, pre-COVID levels while the number of active oil rigs declined for the tenth consecutive week. As we’ve said before, EIA figures likely underestimate true production cuts. Plains All American, for one, suggested that the United States and Canada have shut-in 3.5 – 4.5 MMBPD. Our correlation of multiple data points suggests that actual oil production cuts seem closer to Plain’s opinion, on balance. The number of active oil rigs cut has fallen in half since March, and we see other signs of significant production cuts.

Output might tick up as producers weigh greed vs fear

Now that demand has stabilized (and may even have begun to slightly recover), the next phase of the post-COVID oil story could depart from prior patterns. Some oil producers are struggling just to survive, while others are well-capitalized and enjoy low shut-in costs and break-evens. Now that a storage max-out appears less likely, will the stronger producers feel emboldened and increase production, to drive out weaker competitors or acquire their acreage?

Maybe. Many of the lowest shut-in costs in North America are found in the Gulf of Mexico, with offshore producers. Most of the offshore platforms are run by majors and supermajors with extensive domestic and international onshore holdings, however, which could limit their willingness to ramp up output. Some of the most competitive onshore producers, on the other hand, may be tempted to increase production, to acquire cash-flow poor competitors, or both. OPEC’s decision on restraining production will obviously affect U.S. pricing and production decisions. Some U.S. tight oil producers could thrive in this environment and even expand, while many are running out of runway. So much is uncertain, but the U.S. oil industry is likely headed for another wave of consolidation.