Uncertainty strikes back: crude markets in flux again

Crude oil markets seem to have stabilized after oversupply in Spring, but the future appears uncertain. End-product demand has stabilized but is not recovering as quickly as some hoped, as inventories of crude products such as gasoline, jet fuel, and diesel saw builds in the week ending May 29^th. Oil prices have strengthened in recent days, however, on production cuts and international and domestic demand recovery, including stronger-than-expected U.S. unemployment figures. WTI prices are even flirting with $40/barrel, for the first time since early March. The single most important trend to watch, however, is the consequence of the physical distancing breakdown. As Americans resume normal modes of behavior, we could see a return to typical driving patterns (and higher demand for crude and crude products) – or a second wave of COVID-19 infections, which would likely crush demand. On balance, U.S. crude oil’s future is more uncertain than a week ago.

Crude storage draws in Cushing

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve (SPR), totaled about 532.2 million barrels for the week ending May 29^nd, down by about 2 million barrels from the prior week. According to the U.S. Energy Information Administration (EIA), the SPR received injections of 4 million barrels, as total U.S. crude stocks (including the SPR) rose by about 2 million barrels.

Inventories at Cushing fell again, for the fourth week in a row. Capacity utilization at Cushing stood at 65% from the week ending May 29th, down from 83% at the beginning of the month.

Commercial stocks in PADD 3 (the Gulf Coast) rose slightly to 297 million barrels (an increase of 1.5 million over last week), as imports into the region remained strong compared to prior months. As we noted last week, we saw evidence that storage capacity utilization could be closer to 60%, not 65% as the EIA previously reported, as tens of millions of barrels of storage have been added in recent months. Well, the EIA released new capacity estimates this week showing that PADD 3’s storage capacity utilization stands at… 61%, up from 46% in early January. As a reminder, PADD 3’s superior optionality (including access to waterborne exports) could render its storage facilities more attractive than other locations.

Products demand: Still weak but potentially improving

Last week we discussed that products demand was potentially settling into a new normal, with demand stabilizing, below pre-pandemic levels. We saw continued evidence of that trend this week. Refinery inputs of crude oil rose by ~0.3 million barrels per day (MMBPD) last week to 13.3 MMBPD, but remain well below 5-year averages.

Overall crude product demand fell sharply for the week ending May 29nd to 15.1 MMBPD, down from 16.0 MMBPD in the prior week. Diesel and jet fuel demand slumped by 0.5 MMBPD each, while gasoline supplied rose by 0.3 MMBPD to 7.6 MMBPD. Consumers have used more gasoline for seven out of the past eight weeks, but gasoline stocks remain at historical levels because of historically low demand earlier in the year. The EIA estimates that the U.S. has about 35.6 days of gasoline supply on hand, the highest level on record for any pre-COVID period. It’s also noteworthy that some car insurers, such as GEICO, are lowering premiums based on lower projected driving demand. Gasoline demand recovery could be more gradual than previously expected, although so much depends on COVID-19’s trajectory.

Jet fuel demand fell by half, and TSA passenger throughput data doesn’t point to strong consumer demand for air travel. Airline demand will continue to slowly recover, barring a second COVID-19 outbreak, but a return to pre-pandemic levels seems out of the question for months, probably years (esp. for international travel). Weak jet fuel demand, down 79% from year-ago levels to 0.4 MMBPD, will likely have an impact on refinery operations as refineries try to meet increasing gasoline and diesel demand and manage jet fuel/distillate stock builds.

Diesel inventories continued their march to new highs, as distillates inventories rose by nearly 10 million barrels last week. This is the third-largest week-over-week increase in the EIA’s records and the largest ever outside of the late December/early January period (presumably because diesel consumption pauses during the holiday week). Diesel inventories have risen for nine consecutive weeks, are growing at an unprecedented rate, and show no signs of stopping.

Second wave of infections?

As we’ve noted throughout this series, depressed prices and rising inventory levels have been driven almost entirely by the demand shock resulting from COVID-19. The virus is dictating all market outcomes, including in the energy sector. It remains to be seen whether or not the breakdown in physical distancing in recent weeks will spur a second outbreak – or a return to more normal, higher levels of gasoline consumption. If a second outbreak occurs, a crude storage max-out could become a real concern again. U.S. crude oil’s future is more uncertain.