Oil Market Recovery Threatened By Weaker Fuel Demand

Gasoline demand appears to be weakening in some parts of the United States, as the coronavirus continues to spread. The states hardest hit by the surging number of infections are also some of the largest, with tens of millions of drivers. Much of the country continues to see a slight uptick in gasoline consumption. But in Arizona, Texas and Florida, where the coronavirus is raging, a growing number of people are staying home. Cases are rising in more than 30 states.

Gasoline demand in the U.S. climbed back to 8.6 million barrels per day (mb/d) for the week ending on June 19, up from a low of 5 mb/d in early April. But demand slipped a bit by the end of June as the virus began to spread at a faster clip. On Wednesday, the EIA reported another increase in demand, although the report was offset by a rise in crude inventories, and the slightly muddying caveat that it was a holiday weekend. Gasoline demand is still roughly 1 mb/d below last year’s levels.

In other parts of the world, economies continue to rebound. Germany’s industrial activity picked up pace in June, as did manufacturing activity in China. Strict lockdowns in prior months helped dramatically lower the number of daily infections, and some economies have largely reopened.

But many parts of the U.S. have tried to return to “normal” without ever really getting the virus under control. “[T]oo much optimism at this stage could be premature with total cases in the US, particularly Texas and Florida, surpassing the 3 million mark yesterday, whereas active cases are nearing 1.6 million,” JBC Energy wrote in a note on Tuesday.

The virus also continues to spread in India and Brazil, among other parts of the world. “With global active cases globally slightly less than 4.5 million and showing no sign of a slowdown, we are increasingly seeing downside risk to our total product (particularly gasoline) demand forecast,” JBC added.

A day earlier, the energy firm cut its forecast for U.S. gasoline demand, calling the recovery “increasingly questionable.” Draconian lockdowns were unlikely, as there is almost no political appetite for strict stay-at-home orders, but nevertheless, the spread of the virus will take a toll as governments implement some restrictions and people voluntarily stay home. “[W]e expect demand declines to strengthen moderately through July,” with demand down by 350,000 bpd relative to a prior base case, JBC said.

To be sure, the sharp decline in oil production has tightened up the market. Instead of supply and demand balancing at 100 mb/d, the market is now “balanced” at a level that is 10 percent smaller. In fact, demand could average around 89 mb/d in July, with supply at only 88 mb/d. The oil market has now reached a new “balance at the bottom,” according to Rystad Energy.

But even if the oil market is technically in a deficit, there is still a massive inventory overhang and the threat of another downturn because of the virus. “[W]e think normalisation is going take a long time, and the current drift down in demand data and a renewed drift down in demand forecasts will make that process even longer,” Standard Chartered analysts wrote in a note.

The inventory overhang would last until 2022, the bank added, but that really hinges on OPEC+ sticking with the production cuts until then.

The EIA put out its latest Short-Term Energy Outlook, in which it revised up its estimate for gasoline demand. It now sees 2020 gasoline consumption declining by 2.1 mb/d relative to 2019 levels, a slight improvement from June’s estimate of demand being down 2.3 mb/d.

But that sunnier outlook is at risk if the U.S. suffers another downturn.

“If crude stocks are growing now, while restrictions are loose, traders worry about what will happen to demand in the case serious lockdowns come back again. Stocks are already at quite high levels,” Louise Dickson, oil market analyst at Rystad Energy, said in a statement.