Storage clouds lifting; gasoline demand still soft

Commercial crude stocks fell last week across most of the country, as a disastrous storage max-out appears less and less probable. Still, demand for finished products softened as gasoline demand fell while inventories rose. Diesel inventories continued their sharp ascent even while distillate demand is close to 5-year averages. As we noted last week, a growing glut of diesel inventories could weigh on refinery operations and lead to diverging outcomes in gasoline and distillate markets.

While it is still too soon to declare victory in the battle against storage max-out, there may be cause for relative optimism as the public health crisis appears, at least for now, to be abating. While a second wave of COVID-19 infections remains a critical risk, a combination of physical distancing, warmer temperatures, hygiene, mask-wearing, and progress on vaccines and therapeutics appear to be enabling a return to many pre-crisis activities. We are increasingly confident that a combination of production cuts and (more importantly) recovering demand has halted a storage max-out. Even so, crude and gasoline demand will remain constrained through at least the rest of 2020.

Crude storage draws in Cushing

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve (SPR), totaled about 526.5 million barrels for the week ending May 15^th, down by about 5 million barrels from the prior week. This is the second national-level weekly withdraw from commercial reserves, according to the U.S. Energy Information Administration (EIA). The SPR received injections of 1.9 million barrels for the second consecutive week, however, as total U.S. crude stocks fell by about 3.1 million barrels.

Intriguingly, inventories at Cushing fell sharply again last week. Capacity utilization at Cushing stood at 72% from the week ending May 15th, down from 83% two weeks ago. Cushing stocks reported ~21 million barrels of spare capacity for the week ending May 15th, suggesting that physical constraints are easing.

Commercial stocks in PADD 3 (the Gulf Coast) rose level by 2.4 million barrels to about 285 million barrels. While the rate of injections to PADD 3 inventories has slowed considerably over the last four weeks, it’s noteworthy that builds are continuing even as Cushing crude stocks are declining. Furthermore, PADD 3 stock builds have been alleviated by the 6.7-million-barrel SPR injection since April 17th. If those SPR-directed volumes had instead worked their way into PADD 3 inventories, PADD 3 storage capacity utilization would have risen from 61% to 63%. It appears, for now, that PADD 3’s remaining storage and the SPR will provide ample storage capacity, although some key, intraregional markets could face commercial and/or physical constraints.

Refineries and gasoline: higher weekday mobility, but consumers are cautious

Refinery inputs of crude oil rose by ~0.5 million barrels per day (MMBPD) last week to 12.9 MMBPD. Still, crude runs remain well below 5-year averages.

Continued weakness in product markets continues to weigh on refineries’ crude runs. Gasoline supplied for the week ending May 8th totaled about 6.8 MMBPD, up from 5.1 MMBPD in early April but down from the prior week. While we see signs of an uptick in consumer demand from mobility data, it appears increasingly likely that consumers will not resume normal driving habits until the virus threat recedes, at least.

Due to soft gasoline demand, inventories rose again last week, to about 256 million barrels, well above their 5-year highs.

Diesel and jet fuel demand dynamics continue to cause problems for refinery operations. Jet fuel demand nearly doubled to 0.63 MMBPD last week, but volumes are still off 60% from a year ago. 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. Diesel demand is close to pre-crisis levels, but inventories are growing rapidly and could explode if gasoline production increases.

Since jet fuel demand remains suppressed, refineries are re-orienting themselves to produce higher volumes of gasoline and distillates. Diesel inventories already exceed 5-year highs, however, and could grow even more if refineries increase crude inputs and gasoline production. As we noted previously, if gasoline demand returns to “normal” conditions, refineries will have to sharply ramp up production of both gasoline and distillates. In that scenario, diesel and gasoline markets could see sharply diverging outcomes, particularly during the summer driving season.

Production cuts continued

For the week ending May 8th, the EIA estimates production fell by about 0.1 MMBPD, to 11.5 MMBPD. The EIA estimates volumes are down by ~1.6 MMBPD from late February, pre-COVID levels. We think this is an underestimation of the true production cuts. Notably, Plains All American suggested that the United States and Canada have shut-in 3.5 – 4.5 MMBPD. We also see evidence of dramatic production counts as the number of active oil rigs has halved since March and has declined for nine consecutive weeks.

A storage max-out seems unlikely, but what’s next?

Barring a dramatic resurgence in COVID cases (which is not impossible, incidentally), a storage max-out appears increasingly unlikely. Commercial crude stocks are falling, production is declining, and products demand is no longer in free fall and could increase. We appear to be in the next phase of the oil market’s struggle with COVID.