News & Views
Market Seems Fixated On The Slowdown
Several refinery issues and a tropical storm haven’t been enough to spark a rally in refined product prices this week, as the market seems fixated on the slowdown in reopening that has caused demand to dip in several regions.
The IEA’s monthly oil market report highlighted new threats to demand in North and Latin America due to the rising COVID case count, suggesting the risk in the back half of the year is now heavily favoring more downside, and that sentiment seems to be outweighing the impact of several supply issues.
RBOB futures dropped seven cents in the past two days, despite the Bayway, NJ refinery being forced to shut several units unexpectedly due to a power outage and potential lightning strike this week, the second largest plant having to extend maintenance longer than anticipated, and Canada’s largest refiner (and the biggest importer to the East Coast) announcing it was laying off six percent of its workforce due to the challenging margin environment for refiners.
On top of all those issues Tropical Storm Fay is heading straight for the NY Harbor, and should hit land sometime later today or early Saturday morning. The good news is the storm is moving fairly quickly, and is not expected to strengthen before hitting land, which should limit its impact on the region.
Just in the past few moments August RBOB futures have turned positive, so don’t be surprised to see some short covering ahead of the weekend just in case there is lasting damage from the storm or extended downtime at Bayway.
Good news for several Midwest refiners: inspections on the West Leg of Enbridge Line 5 found no damage, which should keep oil flowing through that segment, while the East line remains shut.
The EIA took a closer look at the drop in U.S. fuel demand yesterday, noting the drastic changes the industry had to make as gasoline and jet fuel consumption dropped to levels not seen in more than 40 years.
Bad News For Diesel Fans
WTI prices have traded in a range of less than two dollars/barrel for the past seven trading sessions, as volatility and interest in energy contracts have dwindled after several months when four to five dollar daily swings were the norm. So far in today’s trading session, that high-low range is just 38 cents/barrel, setting a new bar for apathy. Equity markets have seen a similar but less dramatic drop in volatility in recent weeks.
Bad news for diesel fans: The DOE’s weekly report showed inventories reached a new 30+ year high as estimated U.S. consumption was off 20 percent last week. While sharp drops in diesel demand are common following holidays, this report data was compiled prior to July 4, which suggests the numbers could get even worse next week. Gasoline demand saw another slow but steady gain in its weekly demand – disappointing some anticipating a pre-holiday surge – but remain roughly 15 percent below where it would normally be this time of year.
Although it’s well known that the government estimates on a weekly basis are unreliable – which is why many analysts rely on a four week rolling average – it’s easy to understand why gasoline demand is recovering faster, as personal vehicles that drive its consumption are the socially distant mode of transport compared to the diesel-driven buses, trains and other commercial vehicles, not to mention the lack of demand from drilling rigs. Adding to that negative sentiment for diesel, with air travel remaining at extreme lows, refiners are forced to blend more diesel that would normally go to jet production, adding to the glut on that side of the barrel.
There looks to be a silver lining in the court-ordered shutdown of the Dakota access pipeline for some U.S. refiners. Plants on the East Coast that had built out crude-by-rail infrastructure when pipeline capacity was scarce five to ten years ago should now benefit as the DAPL barrels need to find a new way to market. There seems to be plenty of rail capacity given an overhang of rail cars in recent years, and those buyers should enjoy deeper discounts. On the other hand, plants on the eastern half of PADD 2 are getting squeezed in multiple directions as they were already dealing with the Enbridge Line 5 shutdown.
Total U.S. refinery runs increased for an eighth straight week, with the Gulf and West Coasts leading the move higher. With refined product inventories holding near record highs, and exports still not quite strong enough to balance the supply/demand equation, we may see run rates plateau in the next few weeks if reopening plans continue to stall.
Week 27 - US DOE Inventory Recap
Oil Prices Aren’t Going Anywhere
Grab a snickers because oil prices aren’t going anywhere for a while based on the lackluster trading this week.
A period of summer doldrums is not uncommon for trading in the energy futures complex, particularly following a holiday. This year, it appears that uncertainty over the next phase of the COVID pandemic is overshadowing what would ordinarily be major stories such as the showdown on the high seas between the U.S., Iran, and Venezuela, or the ongoing saga of Libya’s oil output, and keeping some traders on the sidelines.
The API reported crude oil stocks built by two million barrels last week, while gasoline stocks declined 1.8 million barrels and diesel declined by 847k barrels.
The EIA’s monthly Short Term Energy outlook estimated June consumption globally was up 10 million barrels/day from April’s levels, and increased oil price forecasts for the next 18 months due to that rapidly improving demand. Despite the recovery, the report still predicts WTI will be below $50/barrel through 2021, and expects U.S. consumption of gasoline and distillates to still be lower in 2021 than it was in 2019.
The STEO also highlighted its expectation for a rapid increase in renewable diesel imports in the U.S. next year, expecting biomass-based diesel imports to nearly double from 2019-2020 to comply with CA LCFS requirements and the increased RFS targets that would be unattainable through traditional blending of ethanol and bio-diesel.
The 2020 Atlantic Hurricane season is already setting records for the number of named storms and there’s a 60 percent chance we’ll see another storm named this week, that could be headed near the NY Harbor. While this system doesn’t look like it would be anything close to Sandy or other storms that disrupted traffic in the NYMEX delivery hub, it could have some limited impact on vessel traffic.
Today’s interesting read: Why this week’s pipeline rulings may disrupt investment in future energy infrastructure projects.
Prices Consolidating While The World Waits For Recovery
Energy contracts are having a hard time getting on the same page this week, as prices seem to be consolidating while the world waits to see if economic activity will continue to recover even as COVID cases rapidly rise.
Diesel prices are seeing a modest pullback after reaching a four-month high Monday, joining the rest of the complex in neutral technical territory, that looks like it could maintain the back-and-forth while going nowhere with trading pattern in place for a while.
While gasoline prices slipped in Monday’s session, ethanol prices surged by 14 cents, to their highest levels since December, as tight supply in the Argo trading hub and reduced corn planting overshadowed an 18 percent increase in domestic ethanol production over the past month.
Monday had a trifecta of major new for U.S. pipelines. A judge ordered the Dakota Access pipeline be closed and emptied in the next 30 days, the Supreme Court refused to allow construction of the Keystone XL line, and the Atlantic Coast pipeline project was cancelled, even as Berkshire Hathaway announced it was acquiring one of the owners of that project. While those three stories are certainly interesting in the future of fossil fuels debate, near term only the Dakota Access shutdown appears that it might have impacts on refinery operations, as Midwestern plants that rely on the Patoka IL crude oil hub may need to scramble to find replacement supply options, and may put a temporary end to the niche business of exporting North Dakota crude from Gulf Coast ports.
Money managers (AKA large speculators, AKA hedge funds) continue to be unenthusiastic about NYMEX petroleum contracts, with minimal changes in their holdings of WTI, RBOB and ULSD contracts last week, while total open interest in those contracts remains well below historical levels.
Energy Markets Try To Keep Upward Momentum
Following a strong rally ahead of the holiday weekend, energy markets are trying to keep their upward momentum, with limited success in the early going. U.S. stock indices are pointed to strong gains at the open, following a big rally in Asian markets, as optimism for recovery continues to outweigh fears of surging case numbers.
After lagging for most of the recovery rally, ULSD futures are now leading the move higher, reaching a four month high this morning. The near term technical test for distillates will be to close the chart gap between $1.30 and $1.38.
Baker Hughes report three more oil rigs were taken offline last week, bringing the total U.S. drilling count to a fresh record low. The Permian basin actually saw five rigs taken out of service last week, while other basins added two rigs in total.
The CFTC’s commitments of traders report was delayed due to the holiday last week. The ICE report showed money managers increased their net length in Brent crude oil contracts for a fourth straight week, but those combined bets on higher prices remain at the lower end of the seasonal range as large speculators remain cautious on energy prospects.
New lawsuits and reports continue to shed light on the meltdown in oil prices in April, which now appears to have been driven in large part by the latest in a long and infamous chain of retail investors being caught holding the bag by financial engineering gone wrong.
While oil prices have had their best rally on record since the April collapse, refiners are getting squeezed by the rising oil prices as finished products are struggling to keep pace, driving expectations for more refinery closures around the world as the industry is forced to consolidate.
Solid Gains Posted As Trading Winds Down For Holiday
Energy and equity markets are cheering a strong jobs report this morning, posting solid gains as trading winds down for the holiday-shortened week.
The June payroll report showed another strong month for the recovery in U.S. employment with 4.8 million jobs added during the month. The headline unemployment rate dropped from 13.3 percent to 11.1 percent, while the U-6 rate dropped from 21.2 percent to 18 percent. Those figures were better than most forecasts, similar to what we saw in May’s report, suggesting the recovery on the street is much stronger than we see on the news. The big question for July will be whether or not this trend can continue now that states are having to reverse some of their reopening plans.
Spot markets will not be assessed tomorrow, and although there will be an abbreviated NYMEX trading session (you mean the rest of the world doesn’t celebrate July 4th?) there will not be settlements for those futures contracts, so most rack prices posted tonight will carry through Monday.
The latest in the political football known as the Renewable Fuel Standard: Senators from Big Oil and Big Ag states are both separately threatening to block nominations of EPA officials until the agency updates the RFS. At least they finally agree on something. Meanwhile, the EPA administrator is saying the agency is waiting for feedback from the DOE before proceeding with a plan on small refinery exemptions, and is not planning on releasing proposed RFS volumes this week. While the same tired debate plays out in Washington, ethanol prices are surging, well above pre-COVID levels now as inventories have quickly gone from record highs to their lowest in 3.5 years, as producers have not kept pace with the increase in demand.
The DOE’s weekly report showed crude oil stocks had their largest draw of the year, pulling back from record highs, as import volumes slowed and refinery runs continue to inch higher, passing the 14 million barrel/day mark for the first time since March. Normally this time of year we’d expect refinery runs north of 17 million barrels/day.
We seem to be in a pattern of two steps forward, one step back for U.S. fuel demand. Last week, diesel consumption estimates had a nice uptick, while gasoline pulled back. We should see a surge in gasoline demand heading into the holidays, particularly with automobiles now the preferred mode of transport, but total consumption is still some 20 percent below where it should be this time of year.
Week 26 - US DOE Inventory Recap
A Roller Coaster Start To July Trading
It’s a roller-coaster start to July trading as strong overnight gains moved to early morning losses, then back to gains in just a couple of hours. This type of back and forth action is indicative of a market that’s struggling to find direction as good economic news is offset by more bad news on COVID-19 counts.
A large decline in oil inventories of more than eight million barrels reported by the API had oil prices rallying through the overnight session, with WTI trading north of $40 again, only to see those gains wiped out in the past hour. Refined products had a similar pattern, trading up three to four cents overnight only to see those gains wiped out this morning. The API showed gasoline stocks declined nearly 2.5 million barrels last week, while distillates grew by 2.6 million barrels. The EIA’s report is due out at its normal time this morning.
The bulk of the brief selloff in energy and equity futures followed closely behind the ADP payroll report that showed June private jobs increasing by 2.3 million, and May’s estimate seeing a huge revision from 2.7 million jobs lost to three million jobs gained. It seemed that there was an immediate widespread knee jerk reaction to that data – perhaps someone forgot to program their trading algorithm to deal with negative numbers again – that has since faded. While this morning’s swing may be a one-off event, it could also signal that we’re returning to a “bad news is good news” market, similar to what was experienced for several years following the 2008 financial crisis, as the market cheered anytime it looked like negative economic data would encourage more stimulus from the FED.
Second Quarter Winds Down In Quiet Fashion
The second quarter is winding down in a quiet fashion so far with minimal moves in refined products, although oil prices are feeling some downward pressure in the early going. From a chart perspective, most energy futures are moving into a neutral territory which suggests the summer doldrums may soon be upon us with choppy but aimless trading to be expected.
July RBOB and ULSD/HO futures expire today, so look to the August (RBQ/HOQ) contracts for price direction this afternoon.
This was an unprecedented six months for energy markets. Remember in January when the U.S. and Iran started lobbing missiles at each other, threatening to send crude to $100/barrel? What a quaint idea that seemed just three months later when prices for WTI went negative for the first time ever, then about 25 minutes later went to negative $40/barrel.
Perhaps most remarkable about all of it is that as the dust is settling, oil prices are ending the same quarter that saw a 350 percent price drop in one day, with their largest quarterly percentage increase in three decades.
Looking back, the second quarter may be remembered as either the ultimate sign of American resilience, with U.S. energy and equity markets rallying sharply in the face of so much fear and uncertainty, or perhaps as one of the biggest head-fakes of all time if those fears come true later in the year.
It’s been a rough week so far for the oil majors. Exxon announced it was preparing substantial
job cuts over the weekend, BP announced it was selling its chemicals unit Monday, and now Shell announced it was planning an asset write down of up to $22 billion this morning.
Refiners aren’t faring much better these days as margins remain tight, and production increases are hampered by the unknown impact of the latest activity restrictions. Some Midwest refiners are also having to deal with the closure of Enbridge’s line 5 – which could become permanent – and is forcing at least temporary run cuts at OH and MI refineries.
Better times ahead? The Dallas FED’s Texas Manufacturing outlook showed a strong recovery in June, indicating an expansion in factory output after three months of steep declines. Similar to the energy outlook published last week, the factory survey shows expectations that most operations will be close to full capacity by the end of the year. That optimism may be a key barometer to watch in July as we’ll get a chance to see whether or not the tighter restrictions at the state and local levels impact these businesses.
After a volatile June, RIN values have been quiet as we approach month end. The possibility of retroactive small refinery exemptions continues to seem to be the market driving ping pong ball in the renewables market, with governors on the ag side of the debate weighing in with the EPA this week.
Click here to download a PDF of today's TACenergy Market Talk.
Open Or Closed?
Open or closed? That seems to be the debate for energy and equity markets as June trading winds down and we approach what is typically one of the busiest travel weeks of the year.
So far this morning bullish sentiment is outweighing limited rollbacks in US states reopening plans, after that news sparked a heavy selloff across asset classes last week. In the energy space, once again gasoline prices are the most volatile as RBOB futures rallied nearly six cents off of its overnight lows to manage small gains this morning after dropping 15 cents last week.
Baker Hughes reported a decline of “only” one oil rig last week, bringing the total U.S. count to a fresh 11 year low for oil, and the latest in a streak of record lows for combined oil and
gas drilling. The bright side of the report was the weekly drop is the smallest since the COVID-19 collapse in rig counts began, and with prices now hovering close to $40, the positive second derivative in rig counts suggests the end of cut backs may be near.
Money managers continue to seem unenthusiastic about energy trading with only minor changes in positions over the past several weeks, while open interest for WTI dropped to its lowest since February. The drop in open interest is likely due to a combination of factors including volatility returning to normal levels, new oil contracts competing with WTI for market share, and the end of the super contango storage trades.
Speaking of storage: The EIA this morning took a closer look at record high U.S. oil inventories, in reference to reported tank capacity. Although the country has more crude oil on hand than ever, that’s still just 62 percent of working capacity. The NYMEX delivery hub in Cushing, OK, reached 83 percent of capacity in April, but has dropped to 58 percent currently. The report also highlights how both storage capacity and inventories have risen dramatically in the Gulf Coast region over the past year.
Energy Prices Stumble Into The Weekend
Energy prices are stumbling into the weekend after an impressive bounce-back Thursday seemed to stem the tide of selling. U.S. equity markets have followed a similar pattern, rallying sharply after heavy selling, following the FED’s announcement that it would roll back part of the Volcker rule that restricted banks from certain trading activities.
The weekly action has been rough for refiners as gasoline took the hardest hit, adding further pressure to crack spreads that are already treading in troubled waters. The forward curve charts below suggest that the market is expecting those margins to improve slowly over time, but at the current rate of demand recovery, prices suggest a challenging environment for the next nine months.
The EIA this morning reported that the U.S. reached new record for refining capacity at the start of the year. This report of capacity is less relevant than normal half way through the year, as it includes both the PES refinery capacity – even though it’s been closed for a year – and the Holly Cheyenne facility that’s being converted to RD production. The report did note the Limetree bay (FKA Hovensa) plant was reactivated last year, which is counted in the rarely mention PADD 6.
As U.S. oil output and refinery capacity has grown, the industry has been shifting away from the Cushing, OK hub, while the U.S. Gulf Coast is seeing more traffic. The race to profit from this shift goes beyond the physical markets as reporting agencies are rushing to add to the growing list of USGC based crude oil contracts vying to take share from the WTI contract.
The Dallas FED’s Energy Survey for the second quarter showed the largest drop in activity on record at -66%, which acts as no surprise to anyone who has been awake at some time during the past three months. What was unique in this report was that the FED included a section of special questions to better understand the industry reaction to the pandemic, and the results have several surprises. For example, of the 165 oil and gas firms that responded, only five percent reported pipeline or storage restrictions as a cause for reducing their output. In addition, 85 percent expect to have their shut-in production back online in September, and nearly half expect that even in the $30 range that production will come back online. Charts fall below.
Click here to download a PDF of today's TACenergy Market Talk.
Fear Is Back In The Driver's Seat
Fear is back in the driver’s seat for many markets this week with gasoline prices down 19 cents since running into resistance at the 200-day moving average Tuesday, and diesel is down a dime in that two day stretch. Equity market are seeing similar selling across the board, as new restrictions imposed by states have many fearing a demand collapse like we saw this spring.
If you just saw the 10 cent drop in gasoline prices or nickel drop in diesel Wednesday, you might justifiably assume there were some ugly inventory numbers in the DOE report that sent the market reeling. In reality, the DOE report was fairly neutral with only minimal inventory changes and a strong increase in both gasoline and total petroleum demand on the week.
The head scratching numbers from the DOE were the sudden increase in crude oil production of ½ million barrels/day on the week, and the reduction of 600 of the unaccounted for crude oil. It seems that either the agency is either demonstrating how challenging it is to estimate oil production made up of thousands of individual wells on a weekly basis, or actual output has actually recovered much faster than just about anyone expected in the past couple of weeks. That increase in output was enough to offset increased refinery runs and a strong week for exports to push total U.S. crude oil inventories to a new all-time high.
Gasoline demand is now roughly ¾ of the way back from its COVID-19 slump after a big jump last week. Total U.S. consumption is now estimated at 8.6 million barrels/day, up from a low of five million barrels daily during the worst of the initial stay at home period, but still more than a million barrels daily below where we should be this time of year. It seems safe to say that the market is currently more concerned that we’re going to see another drop based on the states’ reactions this week rather than a continued climb in the coming weeks.
Week 25 - US DOE Inventory Recap
Pausing After Weak Finish To Tuesday's Session
The rally in stocks and energy futures is on pause Wednesday, after a weak finish to Tuesday’s session. New tariff tiff talks are taking credit for some of the early selling, in addition to the daily scary headlines of rising infection counts around the world.
RBOB gasoline futures are leading the move lower – taking back their spot as the most volatile of the petroleum contracts and snapping a streak of eight straight daily increases – even though the API reportedly showed a large decline in gasoline inventories of almost four million barrels last week. The industry report also showed a decline in distillates of 2.6 million barrels, while total U.S. crude oil stocks had a small increase of 1.7 million barrels even though refinery runs ticked higher on the week. The DOE’s version of the weekly stats is due out at its normal time this morning.
Tropical Storm Dolly was named Tuesday, but is expected to stay well off the Eastern coast of the U.S. and Canada. It’s been a busy season so far, although the traditional storm producing areas have taken a brief pause as an enormous plume of Saharan dust makes its way across the Atlantic, preventing tropical development before settling along the U.S. Gulf Coast. Meanwhile, non-tropical storms have been creating some headaches across refinery country this week, with numerous emissions events reported as a result of power outages and lightning strikes, although the limited reaction in cash markets suggests minimal if any impact from those minor events.
Looking for something more severe in your weather report? A major earthquake in southern Mexico knocked the country’s largest refinery offline Tuesday following a fire. Like most of Mexico’s refineries, that plant has been operating well below capacity for some time due to a lack of maintenance funds and expertise, so this incident may not have a lasting impact, but there is a chance it could create some bidding for waterborne barrels otherwise destined for the U.S. West Coast.
Markets Climb The Wall Of Worry
WTI was able to punch through $40 in Monday’s session, sparking a move to fresh three month highs for both oil and refined product contracts overnight. Equity and energy markets appear to be climbing the wall of worry in hopes that reopening can continue despite rising infection counts, and the fact that the U.S. and China trade deal is still moving forward.
RBOB gasoline has led the way for much of the eight day rally, and looks to be the first to test new upside resistance at the 200 day moving average just under $1.34. ULSD looks like it has room on the chart to close the gap left by the March meltdown with a move to $1.38. While the weekly charts suggest more upside is likely, faster moving indicators have prices in overbought territory, setting the stage for another round of fast and heavy selling as we’ve seen a handful of times already during this recovery rally.
A WSJ article this morning suggests refiners may ultimately put an end to the bull run for crude, as crack spreads continue to hover around break-even levels. The crack-spread chart below shows that the wide crude spreads that had enhanced margins for many U.S. refiners for years have also tightened up, adding to the challenge of this most unusual operating environment.
A lack of export demand has been a big challenge for many U.S. refiners in the past few months, and an EIA note this morning suggests that it’s not just refined product struggling to find a home overseas as LNG exports have been slashed in half this year.
A Quiet Start To Trading This Week
It’s a quiet start to trading this week as energy and equity markets continue to weigh reopening against rising infection counts. WTI is struggling to break through the $40 mark as the July contract reaches expiration, which looks like the last hurdle on the charts standing in the way of another rally after refined products broke to new highs last week.
Hedge funds look to be taking profits in WTI after a strong two month rally, reducing their net length for the first time in 11 weeks. Despite that reduction, the total outstanding money betting on higher prices in the large speculative trader category remains above the five year seasonal range. It’s a much different story for Brent crude as the total money betting on higher prices is below its five-year range, even though there was another small increase last week. Money managers continue to appear unenthused by refined products with minimal holdings outstanding and not much changing week to week.
Baker Hughes reported another 10 oil rigs were taken offline last week, half of them in the Permian basin. The decline brought the total oil rig count to a new 11 year low, while the combined gas and oil count reached a new record low since the 33 years that this data has been published.
The rapid decline in drilling activity showed up in the Dallas FED’s employment forecast for Texas, as the state saw a large increase in jobs during May after the huge drop in April, but the oil and gas sector continued to see sharp declines in its job count and permitting requests.
In other years, the dramas playing out in Iran and Venezuela would be market-moving news, but this year they barely get a mention as the global glut of oil supply makes their output irrelevant for the time being.
Fresh Multi-Month Highs Reached Overnight
The rally is on for energy futures as both RBOB and ULSD prices have reached fresh multi-month highs overnight after breaking through technical resistance Thursday. All WTI contracts are trading north of $40/barrel this morning, and the prompt contract came within a few pennies of setting its own three month high. Stocks continue their rally, which seems to be adding to the bullish feel in energy prices, as positive trade signs from China are added to the reopening optimism.
So far for the week, gasoline prices are up more than 15 cents, and diesel prices are up more than 11. If the early gains can hold, the charts are suggesting there’s another 10 to 15 cents of upside room over the next few weeks. While the weekly charts point higher, the six day rally since last Thursday’s wipe out has left shorter term technical indicators in overbought territory, meaning we’re getting due for at least a short term pullback.
Cash markets have also seen strength with basis values for most gasoline and diesel contracts increasing this week, suggesting the rally in futures has some real fundamental strength behind it. Part of that strength seems to be supply driven as refinery crack spreads still have not recovered enough to encourage refiners to further increase production, with new reports suggesting plants are choosing to delay unit restarts longer than initially expected.
Ethanol values have been rallying along with gasoline, with some spot market prices now trading higher than they were prior to the pandemic. RIN values have sold off sharply this week however after the EPA reported that RIN generation was up nearly 20 percent in May, and reports that the EPA was still considering some retroactive refinery waivers from the RFS.
Markets Chop Back And Forth
The struggle for directions continues this week as conflicting economic and inventory data has energy and equity markets chopping back and forth. RBOB gasoline futures are trading higher for a fifth day, testing resistance around the $1.22 mark for the eight time in 10 sessions, and if they can finally manage to sustain a break above that ceiling have a clear path to $1.40 on the charts. Oil and ULSD contracts have a more neutral technical outlook and are going nowhere so far today.
The EIA’s weekly oil output estimate dropped by 600mb/day last week. The large drop in oil output coincides with a drop in the unaccounted for crude calculation, which seems to confirm the suspicion of the past two months that the official estimates were overstating actual production by nearly one million barrels/day. There is still more than 600mb/day of oil unaccounted for in the petroleum balance sheet, which may mean real production has dropped below 10 million barrels/day in the U.S., from a high of 13.1 million barrels/day just three months ago.
Diesel inventories saw a small decline, the first time distillate stocks have dropped in 11 weeks. Diesel demand estimates had a second weekly gain after reaching their lowest level in more than a decade, and are now “only” about ½ million barrels/day (roughly 12 percent) below the seasonal average for this time of year. Refiners continue to demonstrate their relative flexibility in dealing with this supply glut, dropping diesel output to a two year low, even as total refinery runs increased on the week, reversing the pattern we saw on the front end of the COVID-19 shutdown.
Gasoline inventories also had a small draw-down – which helped prices recover from the selling sparked from the API’s estimated four million barrel build. Unfortunately for refiners, gasoline demand was estimated to have declined on the week, snapping a three week streak of increases, and giving a reminder of how challenging this recovery is to predict. The weekly consumption for gasoline is now roughly 15 percent below its seasonal five year average, and roughly 20 percent below year-ago levels. A bright spot for domestic refiners in this report was that gasoline exports had a strong increase, which should be good news for the coastal facilities that have come to rely on international buyers to clear their plants.
The Dallas Fed this week highlighted new studies that suggest consumers are much more sensitive to gasoline prices than previously thought, which contradicts decades of economic research on the topic. The end result is that the new findings suggest drivers are more likely to reduce miles driven when prices rise, and if prices stay high over a longer term they will switch to more fuel efficient options.