The COVID Rollercoaster Ride

Don’t look now, but there could be danger ahead for U.S. crude. As we’ve said since the beginning of this crisis, demand is driving market outcomes, and COVID-19 is driving demand. As of this writing, COVID-19 infections are surging across the country (and globally), as new 7-day averages of U.S. infections have risen every day since June 15^th. Despite rising caseloads, many governors have insisted they will not institute additional stay-at-home orders. Still, it’s worth noting that gasoline demand started falling before prior lockdown orders were issued, as consumers responded to a global pandemic by limiting in-person interactions and avoiding unnecessary car travel. Even in the absence of lockdown orders, we expect consumers and businesses to adjust their behavior, scale back activity, and reduce consumption of transportation fuels.

As we’ve said from the beginning, crude and products demand will suffer until the virus is contained through suppression, therapeutics, or a vaccine. If the virus continues to spread domestically, U.S. demand could falter, leading to another crude storage build up. More positively, recovering economies across Europe and most of the Indo-Pacific could support exports.

COVID-19 trajectories

The U.S. appears to be on a relatively unfavorable COVID trajectory, which could limit domestic demand and incentivize exports. The EU appears, for now, to have effectively suppressed the virus, while most Indo-Pacific economies, especially in Northeast Asia, have suffered relatively few cases. U.S. COVID cases, on the other hand, are at a relatively high plateau and are climbing in several jurisdictions, including Texas (municipal governments in the Houston area have instituted a second set of stay-at-home orders). Even in the absence of lockdown orders, consumers and businesses will likely reduce consumption of transportation fuels on their own. If COVID dynamics continue to drive market outcomes, then international crude and crude products demand will likely recover before U.S. consumption.

U.S. crude and products demand: not rising, and COVID is a real risk

Crude and crude products demand has slowly improved over the past month, but, as we’ve noted from the beginning of the crisis, the response to COVID will drive market outcomes. Refinery inputs of crude oil rose by ~0.2 million barrels per day (MMBPD) to 13.8 million barrels per day (MMBPD) for the week ending June 19^th, still well below 5-year averages.

Overall crude product demand rose last week to 17.3 MMBPD on stronger gasoline demand. Although gasoline demand has recovered from early April, it is still below historical levels, and inventories remain high.

U.S. crude and products demand: not rising, and COVID is a real risk

Diesel stocks rose slightly last week to about 174.7 million barrels, as diesel consumption fell slightly to 3.5 MMBPD. Diesel inventories have risen over 40% from March levels in a little over 3 months. Jet fuel demand remained at extraordinarily low levels, with some signs that customers are fearful of traveling again amid rising COVID cases. We continue to watch the interplay between jet fuel demand and diesel inventory levels very carefully: due to the refinery’s technical characteristics, diesel production will surge if refineries increase gasoline output while foregoing jet fuel production. If COVID cases rise, products demand could fall, reigniting crude storage build fears all over again.

Warning: crude stocks are still rising

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve (SPR), totaled about 540.7 million barrels for the week ending June 12th, up by about 1.4 million barrels from the prior week. According to the U.S. Energy Information Administration (EIA), the SPR received injections of 2.0 million barrels, as total U.S. crude stocks (including the SPR) rose by about 3.4 million barrels.

U.S. inventories are rising, but not uniformly. As optionality is crucial during a global pandemic, crude inventories have shifted from landlocked Cushing to the Gulf Coast, where this is ample maritime access and exposure to international markets. Indeed, inventories in PADD 3 (the Gulf Coast) have risen by about 89 million barrels since January to nearly 308 million barrels.

Slow motion builds lead to higher exports?

There are about 142 million barrels of capacity left in PADD 3 commercial storage, according to the EIA, while the Strategic Petroleum Reserve has about 60 million barrels of unused capacity. After accounting for Cushing’s 31 million barrels of remaining capacity, there are about 233 million barrels of available capacity in or adjacent to the Gulf Coast. Therefore, unlike in March, when it appeared that the sky actually could fall, we do not believe a national crude storage max-out is an imminent possibility. Instead of an all-encompassing, worldwide storage max-out, domestic producers could encounter difficulties due to faltering domestic demand and regional storage constraints. This dynamic could pressure prices, widen Brent-WTI spreads, and support exports.

While PADD 3 storage is 64% full, we suspect that some export hubs (most notably Houston and Corpus Christi) have storage fill rates that exceed Gulf Coast averages. If consumption falls significantly and/or production returns with a vengeance, local storage markets could bump up against capacity constraints. If European and Indo-Pacific crude demand remains steady, that dynamic could strengthen Brent-WTI arbs and support exports.

Speaking of production, EIA data shows that domestic production rose by about 0.5 MMBPD for the week ending June 19th, partly because of a storm in the Gulf Coast. It’s possible that oil prices flirting with $40/barrel might entice producers back to the market, but rising domestic COVID infections will dampen producers’ enthusiasm for increasing output.

Crude and products markets won’t return to normal until the COVID infection is contained via suppression, therapeutics, or a vaccine. We are all still riding the COVID rollercoaster.