Gasoline Demand Is Set For A Rapid Rebound

Friday, May 15, 2020

1. IEA: Gasoline demand will come back quickly

- The IEA said in its latest Oil Market Report that global oil demand hit its nadir in April (-25.2 bm/d), and will still be down by 21.5 mb/d in May. But the agency has a somewhat optimistic take on demand recovery for the rest of the year.

- In the U.S., for instance, gasoline demand was down 12 percent in March, year-on-year, and 40 percent in April. But in May, demand will be down 25 percent, and only 15 percent in June.

- In the second half of the year, gasoline demand "returns to normal," the IEA said.

- But that assumes "no continued impact from confinement measures," which, to say the least, is a rather large caveat.

2. U.S. and OPEC+ shoulder cuts

- Non-OPEC supply has already declined by 3 mb/d since the start of the year, with more in the offing, according to the IEA.

- Total global supply is set to plunge by 12 mb/d in May, a combination of shut-ins and the OPEC+ cuts. At 88 mb/d, production will be at the lowest level in 9 years.

- By the fourth quarter, U.S. supply could be down 2.8 mb/d compared to the end of 2019.

- Drilling activity in U.S. shale is at a record low. "[W]e think that the last time there was so little drilling activity in the US was the 1860s during the first decade of the Pennsylvania oil boom," Standard Chartered analysts said in a note.

3. Storage crisis eases

- Just a few weeks ago, the prospect of the world running out of storage crashed prices, including WTI falling deep into negative pricing territory.

- But the inventory builds have slowed, in part because of the severe cuts to supply. "The risk of tank-tops at the global level has dissipated, as the pace of the crude stock build has already peaked," Bassam Fattouh, director of the Oxford Institute for Energy Studies, told Bloomberg.

- In early May, inventories were rising by 4 mb/d, according to Kayrros, a slower pace than the 10 mb/d increase seen in April.

- To punctuate the dynamic, the EIA reported a slight decline in crude stocks this week, evidence that supply shut-ins are balancing out the market.

4. Saudi might opt for flooding the market again

- The threat from the Trump administration to essentially break its military alliance with Saudi Arabia was enough to convince Riyadh to back off its price war a few weeks ago. Saudi Arabia is now working to stabilize the market.

- But in the medium- and long-term, the fiscal incentives might be aligned toward another price war strategy.

- "With higher production and more importantly higher exports, this strategy may result in a similar payoff to a strategy of lower output and higher prices say in the $60-70/b range," the Oxford Institute for Energy Studies (OIES) wrote in a report.

- Going for volume (i.e., ramping up supply) also makes sense in a world in which peak demand looms.

- "[B]y increasing production, the Kingdom can engage in a faster monetization strategy at times when there are concerns that the energy transition will result in lower long-term demand for oil," OIES concluded.

5. Sharp drop in U.S. refining, uptick in China

- EIA data looked promising, with both crude oil and gasoline inventories declining in the most recent week of data.

- The reason for that is a sharp decline in refining processing (in addition to upstream supply declines, and end-user uptick in gasoline demand).

- In China, refineries start in the recovery phase, adding back capacity.

- "Refinery utilization in the province of Shandong, a home for 80% of China's small independent refineries, recently increased to 75%, its highest level since records began in 2011," Commerzbank wrote in a note. "It had plunged to below 40% in February amid the corona measures that were implemented in China."

- Commerzbank added that diesel demand also increased recently because of infrastructure stimulus in China. "As a result, stocks in China seem to have actually fallen of late despite higher imports," the bank said.

- Still, as JBC notes, refining margins remain in negative territory in many parts of the world, including the U.S.

6. Natural gas prices decline in "much-needed correction"

- Natural gas prices have fallen back sharply in the past week and a half, down from $2.13/MMBtu on May 5, back to below $1.70/MMBtu at the end of this week.

- Sentiment had been building in a bullish direction since March, based on the assumption that associated gas production from the Permian would decline.

- Associated gas declines have "remained below our expectations," Goldman Sachs wrote in a note.

- "It is important to emphasize that the high storage levels we expect at the end of this summer, which in our view keep the upside to summer 2020 NYMEX gas prices capped, will likely be needed as the market transitions to a much tighter balance from this next winter," Goldman Sachs wrote in a note.

- The bank said the recent slide in prices was a "needed correction," but the bank also said that the price decline would keep more gas supply off of the market - more coal-to-gas switching, less drilling, etc. Goldman maintained its $3.25/MMBtu price forecast for 2021.

7. Net long bets on oil surge

- In the last week of April, net long bets on WTI and Brent rose to 318 million barrels, the highest since January.

- Investors piled into long bets after WTI crashed below zero before quickly rebounded to the teens. Long bets on petroleum products, on the other hand, remain depressed.

- "Combined net length gained throughout April and stood at 477 mb at end-month, over 300 mb below the level seen at the start of the year," the IEA said.

- Meanwhile, on the futures curve, the six-month WTI contango has shrunk to under $5 per barrel, a sign that speculators think the market is tightening and on the mend.

- Still, if positioning becomes overly bullish, the risk of a sudden and sharp price decline increases. A shift in market sentiment in a more bearish direction would provoke a selloff.