LONDON (Reuters) - U.S. petroleum consumption has fallen by a third since the economy went into lockdown in March but showed signs of stabilising last week, according to the latest weekly figures from the U.S. Energy Information Administration.
Lockdown has caused the biggest economic interruption since the depression of the 1930s and the largest interruption in oil consumption since the birth of the modern petroleum industry in the 1860s.
The challenge now is for domestic oil producers, importers and refiners to adjust to a prolonged period of lower consumption and bring the increase in inventories under control before storage space runs out.
The total volume of petroleum products supplied to the domestic market averaged 14.1 million barrels per day (bpd) in the week ending on April 17 (“Weekly petroleum status report”, EIA, April 22).
The total volume was essentially the same as a week earlier (13.8 million bpd) but down by around a third compared with five weeks ago before the lockdown began (21.5 million bpd).
In response to lower demand, U.S. refiners cut crude processing to 12.5 million bpd last week, down from 15.8 million bpd five weeks ago and 16.5 million bpd at the same point a year ago.
U.S. crude imports slowed to just 4.9 million bpd last week from 6.5 million bpd five weeks earlier, one of the fastest declines in the last decade, and were running at the slowest rate since 1992.
But the refining system is still struggling to digest the enormous volume of unprocessed crude that has accumulated since the economy went into freefall and to limit the build up of unsold fuels.
Total stocks of unrefined crude and products, excluding the strategic petroleum reserve, increased by a further 25.5 million barrels last week and have risen by a total of 109 million barrels in the last five weeks.
Last week’s inventory increase was the third-largest since records began in 1990. Four of the six largest weekly stock builds on record have occurred in the last five weeks.
In crude alone, stocks rose 15 million barrels last week and are now up 65 million barrels since March 13, rapidly filling storage capacity, albeit from an initially low level.
Nationwide, crude storage capacity is now 60% full, up from 50% five weeks ago and 52% at the same point a year ago.
There is still capacity to store another 262 million barrels, with most of the unused space on the Gulf Coast where there is still room for 156 million barrels.
Crude storage space is scarcer around Cushing, Oklahoma, the delivery location for the NYMEX light sweet crude oil contract.
Crude stocks at Cushing have risen by 21.3 million barrels over the last five weeks and there is now just over 18 million barrels of unused tank space available in the area.
Cushing’s storage is 76% full, up from 48% five weeks ago and 56% at the same point in 2019, based on estimates from the EIA (“Weekly U.S. and regional crude oil stocks and working storage capacity”, EIA, April 22).
The remaining storage at Cushing is already fully owned or leased and not generally available to take further deliveries (“No vacancy: Main U.S. oil storage in Cushing is all booked”, Reuters, April 21).
The lack of delivery options contributed to the severe dislocation of U.S. crude futures for May delivery on Monday and is now causing traders to avoid futures contracts with delivery dates in June and July.
Compounding the problems, inventories of unused gasoline and diesel are also climbing rapidly, despite cutbacks in refinery production.
U.S. gasoline inventories have risen by 22 million barrels over the last five weeks and are now 37 million barrels higher than at the same point last year.
Gasoline stocks stand at a record 263 million barrels, equivalent to almost 50 days of consumption at the current reduced rates, up from 240 million barrels and 25 turnover days five weeks ago.
Distillate stocks, too, have swelled by 12 million barrels over the last five weeks, though from a much lower initial level. Although they remain well within the prior ten-year range, they are climbing fast.
Crude remains the most oversupplied part of the market and there will need to be further reductions in both domestic output and imports to ensure tank space does not run out over the next few months.
Storage around Cushing could become completely full in less than four weeks if the recent rate of inflow continues.
If Cushing space continues to tighten, the Chicago Mercantile Exchange, which operates the U.S. light sweet crude futures contract, will need to take steps to ensure the contract remains useable.
Even if the lockdown starts to ease, refiners will have to restrict processing rates for some time to absorb the excess distillate and especially gasoline which has already built up.
Restricted refining activity will in turn worsen the oversupply of crude over the next few months and ensure prices remain under pressure.
Domestic crude output will have to fall sharply, likely by 3-5 million barrels per day, to bring production back into line with consumption, and even below it for a period of time to work off the overhang of excess stock.
Oil producers, refiners and traders have already started to adjust, but the scale of the changes required is unprecedented, and the rest of the adjustment process is likely to be protracted and painful.
John Kemp is as Reuters market analyst. The views expressed are his own.
- Global oil consumption cut by up to a third (Reuters, April 16)
- Oil futures point to long and deep recession (Reuters, April 15)
- Oil industry crisis starkly revealed in U.S. weekly data (Reuters, April 9)
- Global oil storage to fill rapidly as consumption plunges (Reuters, March 27)
Editing by Kirsten Donovan