Crude oil prices have recaptured the $40 mark in July after tumbling into negative territory for the first time in history in April. Rising gasoline demand in conjunction with lower supply has been the catalyst for the rebound. Additionally, a softer dollar has also helped buoy WTI crude oil prices which are quoted in US dollars. With prices near $40 per barrel, they are still not high enough to bring US shale producers back into the fray. At the end of July, the current OPEC+ cuts are scheduled to expire.
Imports are Rising but Production is Flat
The rising demand is pushing crude oil imports back to the United States. The Energy Information recently reported that US crude oil imports averaged 7.4 million barrels per day last week, which was a robust increase of 1.4 million barrels per day week over week. Over the past month, crude oil imports to the US were down 8.5% averaging about 6.6 million barrels per day compared to the same month in 2019. Production in the US has declined during the past 4-months dropping from more than 13-million barrels a day to 11-million barrels a day but has remained flat during the first week of July. The high levels of imports which are offset by rising demand should keep inventories at the current high level which could act as a headwind for prices. Inventories climbed by 6.7-million barrels a day in the first half of 2020 according to the Energy Information Administration.
Production is Expected to Decline
The rapid dropoff in US production was compounded by the decline in OPEC+ output which now stands at 22.6-million barrels a day. Recall, OPEC, Russia, and other producers, a group known as OPEC+, agreed to cuts of 9.7 million barrels per day beginning in May through July 31. The US production is expected to decline through 2021 and will average approximately 11.6-million barrels a day which is slightly higher than the current output of 11-million barrels a day according to figures from the EIA.
Demand is Beginning to Rise
The rapid falloff in oil prices was driven initially by the contraction in demand. Shelter in place orders was the catalyst for the drop in both gasoline, diesel, and kerosene demand. Jet fuel demand is also down significantly. Consumption is expected to average 18.3 million barrels a day in 2020 which is down 10% year over year according to figures released by the EIA. This includes a decline in Jetfuel demand that is expected to be down approximately 30%. The decline reflects the lack of travel and movement across the United States during the ongoing social distancing mandates. While consumption is down it is expected to rise in 2021, increasing to nearly 20-million barrels a day. What is unclear is whether the decline in consumption is in the rearview mirror or a possibly coming back, as many states around the US close up for a second time.
Gasoline Demand is Expanding
It appears that gasoline demand is rising and that refiners are increasing their output. US crude oil refinery inputs averaged 14.3 million barrels per day during the week ending July 3, 2020, which was 315,000 barrels per day higher week-over-week according to the most recent report from the EIA. Refineries are also operating at a higher level than they have been in the past 3-months which has led to an increase in gasoline production.
Inventories Remain Buoyed
US oil inventories remain elevated and above the 5-year average range. In the first week of July, the EIA reported that US crude oil inventories increased by 5.7 million barrels from the prior week. US crude oil inventories now stand at 539-million barrels which is about 18% above the 5-year average range for this time of year. You can see from the chart provided by the EIA that oil stockpiles are above the average range as well as the average in the wake of the pandemic.
The stronger demand for motor fuels reduced gasoline inventories by 4.8 million barrels in the latest week. Gasoline stockpiles are now 8% above the five-year average. Distillate fuel inventories, which include products like diesel fuel and heating oil increased by 3.1 million barrels last week and are about 27% above the five-year average.
Demand is Improving
Despite the uptick in COVID cases throughout the United States, more people are getting back on the road. This relaxation in restrictions is buoying demand. President Trump has no interest in re-closing the US economy and will try to get people out and about which should keep fuel demand on an upward trend. Aggregate demand for crude oil products increased to 17.8 million barrels a day which is down 15.1% year over year but up from tepid levels seen in May. During May gasoline demand was down more than 25% year over year. The most recent data shows that gasoline demand is up to 8.5 million barrels a day which is down 12.5% year over year. Distillate fuel demand averaged 3.5 million barrels a day down by 10.3% from the same period last year. Jet fuel demand was down 57.2% year over year.
The Bottom Line
Crude oil prices have been volatile generating whipsaw commodity trading. Prices have rebounded from -$37 in April, to more than $40 in July. With prices at $40 most producers in the US still cannot make money. Demand is beginning to climb especially gasoline demand. While it is still down 12.5% year over year, it has improved significantly from the lows seen in April. Jetfuel demand has also rebounded but remains depressed. Inventories are 18% higher than the 5-year average and well above the 5-year average range. The EIA expects demand to rise and supply to remain stable which could put upward pressure on prices, but first stockpiles will need to decline to the upper end of the range for the current time of year.
