2020: The Year of Shut-ins— Will Gasoline Save the Day?

U.S. crude maintained trends from the previous week. Crude production is down; storage levels are building, albeit at a slower pace; refineries are slowly ramping up as drivers consume more gasoline; and crude imports and exports both rose slightly. While these trends, reduce the possibility of a storage max-out on balance, it’s too soon to declare victory in the battle against reaching tank top. If a second wave of COVID-19 infections hits the U.S., consumers could respond by scaling back their activities even more. Alternatively, however, they could accept risks as the “new normal” and carry on most activities, albeit at a lower baseline than pre-COVID levels. Gasoline demand could provide early clues about crude demand recovery.

Crude storage builds continue to slow

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve, total over 532 million barrels, slightly under the record amount of 536 million barrels in storage set in March 2017. The pace of weekly storage inventory injections continues to slow, however, as the most valuable storage locations have already been commercially reserved. Commercial inventory injections rose by 4.6 million barrels for the week ending May 1^st, down from 19.2 million barrels three weeks prior. The SPR continued to receive injections, however, as stocks rose by 1.2 million barrels.

Key regional storage centers continue to build inventories, however, pressuring producers. Cushing has likely been full commercially for weeks; we see evidence that it is operationally constrained and has essentially reached physical capacity. PADD 3 (the Gulf Coast) is a more complicated story. Even after accounting for injections to the SPR, PADD 3 storage build rates are down sharply from just a few weeks ago. PADD 3 inventories rose by about 10 million barrels per week in the beginning of April, but in the week ending May 1, Gulf Coast commercial inventories rose by just over 2.3 million barrels. Even with a 1.7 million barrel build to the SPR last week, PADD 3 inventories are showing signs of slowing. There could be a spike in PADD 3 stocks in subsequent weeks, however, as a flotilla of Saudi tankers reaches the Gulf Coast.

Even if builds slow, crude specifications will constrain storage. Not all grades of crude can blend with one another; some tanks will be reserved for heavier grades of crude than Permian or Eagle Ford producers would prefer. With commercial storage increasingly constrained, more injections into the SPR are coming.

The next few weeks could determine the rest of the 2020

Crude exports and crude inputs into domestic refineries rose again last week, while gasoline inventories fell again. These are all signs that demand is stabilizing, but we think it’s too soon to say that these trends will be sustainable. Consumer behavior is worth watching very carefully over the next few weeks.

Crude exports rose again, as international markets in Europe and Asia appear to be getting better at managing the COVID-19 crisis.

In domestic markets, refinery inputs of crude oil rose again, but barely. Crude inputs to refineries for the week ended May 1 totaled a little under 13 million barrels per day (MMBPD), or over 3 MMBPD below levels from February or the same prior-year period.

While crude inputs are stable, gasoline stocks are falling. Gasoline inventories for the week ending May 1st fell about 7 million barrels from two weeks prior; Americans increased their gasoline consumption to about 6.7 MMBPD for the week ending May 1st. Good news for crude inputs, right? Maybe – but inventories are still close to all-time highs and demand remains extremely low. Gasoline stocks totaled about 256 million barrels for the week ending May 1st, 9% above 5-year average levels.

Similarly, while gasoline demand picked up, it’s still the lowest period of demand since January 1994. If current trends continue, gasoline stocks will remain above their 5-year averages until early July, limiting refineries’ incentives to process volumes.

We can’t stress this enough: crude demand depends on public health (and consumer) responses to COVID. If domestic and international responses to COVID-19 can limit damages and mitigate risks, crude demand will stabilize and start to recover. If another wave of outbreaks hit the U.S. or its key export markets, crude demand will likely remain far below pre-COVID levels.

Production: biggest weekly cut since April 3rd

For the week ending May 1st, the EIA estimates a production cut of 0.2 MMBPD. Actual cuts could be about twice that amount. Still, this is clearly the largest production cut since April 3rd, when the EIA estimated that output fell by 0.6 MMBPD. Production cuts continue apace.

Is the cut deep enough?

Will production cuts avert a storage max-out? There’s certainly more data to support that view this week: crude inventory injections are slowing, gasoline demand is up, and exports are rising. These are all signs that demand is recovering and, along with production cuts, suggest that storage builds are less likely. Nevertheless, it is far too soon to predict future demand with certainty. As U.S. states and European countries re-open, they will face serios risks of another round of infections from COVID-19. Domestic and international responses to COVID-19 will determine if demand recovers, or if we could be in for a “W-shaped recovery.”