Oil prices and oil products, including gasoline and diesel, have tumbled in the wake of the COVID-19 crisis, and demand is far from ready to rebound. Most of the world is ready to begin the process of reopening their economies, but until consumers get on the road or in the air, oil demand will remain subdued. Generally, at this time of year, US gasoline demand is starting to push into high gear, peaking during the summer above 10-million barrels of demand per day. Ethanol production is experiencing a drastic slowdown in response to the market being flooded with fuel at a time that demand has disappeared.
What Happened?
The novel coronavirus started to spread in Wuhan China and made its way into Asia, and then western Europe. Italy experienced a major outbreak, and in early February the spread of COVID-19 moved into the east coast and the west coast of the United States. The US is the world’s largest consumer of oil, ingesting approximately 20-million barrels a day. As countries around the globe began to shut down, the consumption of petroleum started to drop. In the US, total consumption has declined by approximately 28%, with most of the drop seen in gasoline and jet fuel.
According to the US Department of Energy, the total volume of petroleum products consumed in the last 4-weeks is 14.5 million barrels a day, down by 28.0% from the same period last year. The breakdown is as follows. During the past month, gasoline demand averaged 5.3 million barrels a day, down by 43.7% from the same period last year. Distillate fuel, which includes heating oil and diesel averaged 3.2 million barrels a day over the past four weeks, down by 15.1% from the same period last year. Lastly, the Energy Information Administration reported that Jet fuel demand was down 61.6% compared with the same month last year
The drop in gasoline has harmed renewable fuels such as ethanol. US ethanol exports were already on the decline and the impact of the COVID-19 has made the issue even worse. US ethanol exports fell by 14% in 2019 even though the number of export destinations increased from 34 destinations in 2018 to 39 destinations in 2019. On the renewable front, the lack of gasoline demand has hit harder than diesel. The trucking industry has had to continue moving production and inventory while Amazon trucks have been busy filling everyone’s home shopping needs.
The Decline in Demand was Met with a Supply Cut
The drop in demand has been the catalyst for the decline in prices, but an initial crude oil war, between the Saudi’s and Russian’s, created an impetus to push prices even lower. In the wake of the spread of the virus, OPEC was looking for a solution that could counter the huge decline in demand. Their goal was to cut production, but Russia was uninterested, as they viewed the rise in US production as a major issue. The US has increased production by more than 1-million barrels a day over the past year. Russia wanted the US to cut production as well before it would come to the table.
Eventually, OPEC+ decided on a production cut that would remove 9.7-million barrels a day from global production. Norway recently followed and plans to reduce production in June. The US has not officially joined the production cuts but has been forced to shutter many rigs. The number of oil rigs that are in production in the US, has dropped substantially. In early April, Baker Hughes, the oil rig giant reported that the number of active US rigs drilling for oil dropped by 53 to 325. The oil-rig count has now declined for seven weeks in a row. The total active US rig count, meanwhile, also fell by 57 to 408. This compares to a 35-year high of 1,609 active rigs and a low of 98-active rigs. This has taken 700 thousand barrels a day off the market. The last time the US active rig count was at the current level, the oil production in the US was approximately 9-million barrels a day.
The Bottom Line
The upshot is that demand will need to come back for prices to rise. Companies involved in the production of oil or renewable fuels will remain under pressure until prices can rebound. Oil companies are cutting production and if the lack of demand persists, dozens will go out of business. While the world is slowly beginning to come back and undertake certain activities, without employees going to work, or people taking vacation it’s hard to see petroleum demand rebounding to prior levels.
