Why did crude stocks decline?

As we wrote in our July 2020 newsletter, crude and products demand faces a hard ceiling, a softer floor, and a narrowing range. Demand likely won’t exceed pre-COVID levels until the virus is defeated; new outbreaks could curtail demand (albeit not to April or May levels); and better understanding of COVID’s medical risks likely ensures better risk management by consumers and businesses. We believe this provides a useful framework for understanding crude markets – and recent data continues to support this theory. Demand for crude and products is inching towards 5-year averages. This week, we’ll explain why crude stocks fell by over 10 million barrels in the most recent weekly data reported from the U.S. Energy Information Administration (EIA).

Crude storage declines

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve (SPR), totaled about 526 million barrels for the week ending July 24^th, down by about 10.6 million barrels from the prior week. According to the EIA, there were no injections or withdrawals from the SPR.

Why did crude inventories fall?

Several factors explain the reduction in crude inventories. First, crude oil imports fell by nearly 0.8 million barrels per day (MMBPD). Imports in the Gulf Coast (PADD 3) were down by nearly 0.7 MMBPD; Midwest (PADD 2) imports fell by nearly 0.3 MMBPD. The East Coast (PADD 1) saw an increase of 0.2 MMBPD in imports, however, even as overall inventories posted the sharpest weekly decline since June of last year.

Second, crude inputs to refineries rose by nearly 0.4 MMBPD, with PADD 3 accounting for most of the increase. Crude inputs are inching towards their 5-year averages, although we expect that COVID will prevent a return to “normal” consumption levels for some time.

Third, crude exports rose by more than 0.2 MMBPD. We expect relatively low COVID cases in the EU and Northeast Asia to continue to support U.S. crude exports. Depending on COVID dynamics, we could even see a widening Brent-WTI differential later this year.

School re-opening and U.S. demand

Will school re-opening work? If schools can open safely, economic recovery could accelerate. On the other hand, school re-openings could also lead to a disastrous avalanche of infections and bring the economy to a screeching halt once again. U.S. producers largely remain in a COVID holding pattern: they may be deferring production increases and drilling until prices consistently remain above 40-45$/bbl (at that level, prices are high enough for previously shut-in wells to come back online). Bakken producers also have to consider potential future takeaway constraints, depending on the ultimate resolution of the DAPL and High Plains pipeline issues.

COVID continues to drive all outcomes. While U.S. COVID cases are (mercifully) falling, school re-openings could reverse that trend. While uncertainty is lower than in March or April, U.S. producers are still watching and waiting.