US Crude Oil Supply and Demand – Latest Developments and Drivers

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US Crude Oil Supply and Demand - Latest Developments and Drivers

In today’s energy markets, the story is anything but coherent. However, below are some recent talking points on both the demand and supply side for crude oil markets to think about as well as a short commentary on supplementary markets such as oilfield services and frac sand supply and logistics markets.

 

Demand

As some restrictions are lifted with respect to stay-at-home orders in the United States and people have begun to see a glimmer of normalcy, large refiners have seen indications of gradual recovery. For instance, Valero Energy, the 2nd largest oil refiner in the US has seen gasoline consumption recover from 55% of pre-pandemic levels to 64% of pre-pandemic levels according to the latest 7-day average.

This could potentially be seen as a strong leading indicator for US oil demand as the EIA is pegging U.S. total oil consumption up week-on-week significantly (to ~15.8m b/d from 14.1m b/d a week ago).

While this is encouraging, with social distancing measures still in place and the Coronavirus that operates on its own timeline, it is uncertain just how much of a recovery and how quickly these figures will recover.

 

Supply

At its peak, the United States was producing just over 12.8 million barrels per day of crude oil.  The EIA weekly release shows a whopping 1 Mb/d decline in US L48 crude production in the past six weeks.

According to intel sourced from Dan Pickering, former President of energy investment bank Tudor, Pickering, Holt & Co., a “tsunami of shut-ins are coming. Speaking with multiple public/privates, all [are] saying they’ve got their plans and are starting to turn off volumes [and] realized cash pricing [of] $2-$10 [is] the driver.”

While a statement was made during Enterprise Products Partners’ 1Q earnings release that so far there hasn’t seen a “material” drop in flows, signs are showing that lower levels of production could be in store for midstream players just a short distance down the pipeline.

As stated in the EIA US weekly crude oil storage figures, the Cushing delivery point leads the way among PADD districts at 76% of full capacity as of April 17. It is interesting that it is over 15% more utilized than other designated storage in the mid-west, putting the WTI contract (with Cushing Oklahoma as its delivery point) under further scrutiny as the favored US benchmark.

Given this recent news, what effects will be had on prices? In such a volatile market, only time will tell. There have been signs of recovering demand for crude oil and fuels (particularly gasoline) as stay-at-home orders and social distancing guidelines have begun to loosen, and signs of supply rebalancing after substantial crude oil declines in the US lower 48, operators driven by the market to shut-in portions of their producing well inventory, and that storage numbers in the US lower 48 less full than perhaps is represented by commodity priced at Cushing, Oklahoma. Today, we have seen oil prices climb after inventories have risen 9 million barrels, less than the 11 million barrels previously projected by a survey of analysts and traders in the Wall Street Journal. Not to put the cart before the horse, but perhaps this could be a glimmer of optimism for frac sand producers and oilfield services, whose profitability is highly dependent on crude oil prices being above the breakeven capital cost to drill and complete new wells.