Last time when prices at the pump were so low—about four years ago—it was heaven for drivers. Now, with lockdowns across most states, it is anything but: gasoline may indeed be cheap, but nobody is driving.
Over the two weeks to April 1, the Energy Information Administration (EIA) reported a cumulative increase in gasoline inventories of as much as 18 million barrels. This comes at a time when people would typically be preparing for the start of the summer driving season.
Not this year.
The average price of gasoline in the United States as of last Friday was $1.883 per gallon, CNBC reported this week, citing data from AAA. That's down by almost one-third from this time last year, and it could fall further as demand slumped to a 50-year low last week. According to AAA, gasoline prices could fall below $1.70 a gallon if demand destruction continues. Unfortunately, this seems to be the case.
The U.S. has become the country with the most cases of Covid-19 and the most deaths as well. Statistical modeling from the Institute for Health Metrics and Evaluation at the University of Washington has suggested that the peak of infections could come before May, after which the cases would start to decline. Not everyone, however, is convinced that this model reflects reality--not as China and South Korea start to observe a second wave of infections.
"The one thing we absolutely know for sure is that social distancing measures work," the inventor of the model, Christopher Murphy, told CNN. "It leads to a situation where every case is infecting less than one other case, and that means if you keep the course, you'll get transmission essentially down to zero."
If social distancing works, it may well be extended, and this will prolong the demand slump in gasoline. It will also deepen it: some of the experts who spoke to CNBC on the topic expect prices at the pump to fall to unprecedented lows. It all depends on how long social distancing measures stay in place.
Refiners are already lowering run rates. Marathon Petroleum has closed one small refinery. More shutdowns are on the way if the current situation continues, which seems to be the dominant opinion. Refineries are closing across Europe and India as well amid the lockdowns. At the end of March, the loss of fuel demand globally was seen at 15 to 20 percent for the second quarter. Now, it could end up being even higher.
This puts the oil industry, not just in the U.S. but across the world, in a possibly unique situation. Usually, when exploration and production companies suffer from too low oil prices, refiners benefit from cheap feedstock. Now, crude oil prices are low, but so is demand for fuels. Every segment of the oil industry is suffering, and it may get worse.
The storage problem that became the topic of conversation about a month ago when tanks and tankers began to fill is still very real. The OPEC+ deal to take 9.7 million bpd of oil off the market will not take effect until next month. Meanwhile, India and China are buying cheap crude to fill their strategic reserves, which could lend some support to demand, but only for a while: storage space is finite, and India, for one, does not have all that much of it.
It's a crisis like no other. The world is bursting with oil supply, but demand is on assisted ventilation. And some countries are already talking about extensions to their lockdowns, notably Italy and France, which were among the hardest-hit by the virus. The longer the lockdowns remain in place, the lower prices at the pump will get, and the deeper the trouble for refiners will become. This time, there will be no winners.
By Irina Slav for Oilprice.com
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