June 2020 Inventory Trends Full Report

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IHS Markit now estimates first-quarter global crude oil demand fell year on year by 8 million barrels per day (MM b/d) and second-quarter demand by 20 MM b/d. Recall that IHS Markit noted in early March that first-quarter demand would be the biggest quarterly decline on record, down 3.8 MM b/d, caused by a stir at the OPEC+ meetings in Vienna. Before COVID-19, a year on year change in oil demand of 1 MM b/d was significant and any changes outside of this norm were viewed as being highly disruptive. The global crude oil system is quite agile and adaptive, and many factors come into play in relation to fundamental supply, demand, and trade.

In any event, the global oil system is rebalancing and adjusting continuously. What seemed to be apparent recovery in crude oil demand could be muted given the COVID-19 repercussions from the flare-up of cases across China. This, along with the possibility of a wider-spread resurgence of the virus leading to reissuance of lockdown orders and the general population voluntarily sheltering-in-place to avoid infection, could mute the oil demand recovery. These possibilities could lead to an oil demand recovery halt or even a reversal to first-quarter levels; this is not expected or included in IHS Markit’s current monthly forecast and the global oil balances will move to a deficit position in late 2020 and remain in deficit in 2021. This leads IHS Markit to a global crude oil price in the range of $40-42 per barrel ($/bbl) for the balance of 2020 and an average price of $46/bbl in 2021.

The key driver for understanding oil demand going forward is mobility (namely gasoline, diesel, and jet fuel) or lack thereof, and production trends and policy. The United States as a supplier is at the epicenter of global crude oil market risk given its ability to recover and increase oil demand while at the same time stay on a course of lower upstream activity and managed oil production declines. IHS Markit expects and forecasts global crude oil demand will outstrip supply during the second half of 2020, leading to supply deficits and a tighter market. IHS Markit believes the bottom of the oil market occurred in April and to some degree is reflected in spot market pricing. For example, West Texas Intermediate (WTI) crude oil price has appreciated from single digit pricing in late April to an average of approximately $38 per barrel ($/bbl) in June, reflecting a demand recovery against the current supply situation. IHS Markit’s current view is United States crude oil production will decline in 2020 and 2021 while OPEC output is set to rise in 2021.

The rise in OPEC production will provide support to a global propane market that has and is expected to tighten up over the latter half of this year and into next year. Support from global propane suppliers to support incremental Chinese chemical plant capacity additions will be needed to keep the U.S. propane market in balance. This will stave off the potential for Mont Belvieu propane price increases and spikes.

The U.S. Propane Market

The U.S. crude oil production cuts have been reversed as the crude oil market price recovers. For example, Permian basin natural gas and other associated natural gas producing areas (those areas keen on producing oil and associated natural gas is a by-product) has recovered more than 2 billion cubic feet per day (Bcf/d) on the heels of oil well actions and activities. This recovery in associated natural gas production is estimated to yield approximately 60,000 b/d propane. The rising and stabilizing oil price has instilled some market confidence and further oil production cuts and well shut-ins are not expected or forecasted. IHS Markit therefore expects the steep decline in propane production has waned and a slow decline in production is expected and forecasted based on our assessment of U.S. crude oil and natural gas production and by-product natural gas liquids (NGL) and refinery throughputs.

U.S. propane production comprised of supplies from natural gas processing and refineries have been working in tandem over the past three months leading to somewhat stable combined propane production stream. As the crude oil shut-ins have ceased and with some wells being put back into service, propane production from natural gas processing has recovered in lieu of the precipitous decline since earlier this year. The crude oil price recovery, approaching and hovering just below $40/bbl, is signaling an improvement in the outlook for propane production from natural gas processing. Also, IHS Markit made small changes to propane production from refineries as compared to last month’s trend report based on a revision to refined product demand for the latter half of 2020. It is important to note propane is produced not only from oil wells via propane contained in recovered in associated natural gas but is also produced from natural gas well, those wells with the primary fluid being natural gas with propane entrained in the natural gas. Why is this important? Upstream producers in the Appalachia region have been shutting in production and slowing upstream activity given the over-supplied U.S. natural gas market. The U.S. natural gas price has been falling over the last 3 months and is currently trading around $1.50 per million British Thermal Units ($/MMBtu).

Based on the above total U.S. propane production forecasts has been increased an average of almost 27,000 b/d on a monthly average basis for the latter half of 2020 as compared to the previous month’s trend report. The overall increase is highlighted by an increase in production from PADD 3, and PADD 3’s propane production was increased by approximately 32,000 b/d for the latter half of 2020. Propane production from the other PADDs were reduced slightly resulting from mainly upstream activity and to a lesser degree refinery throughputs.

U.S. propane production from natural gas processing after following crude oil production during March, April and May and have since recovered slightly in June resulting from wells being brought back online and refinery throughputs increasing as compared to last month’s trend report. Refinery throughputs and related propane production is expected to follow refined product demand over the next few months increasing from 0.47 MM b/d in May to 0.53 MM b/d in September. At the same time propane from natural gas processing is expected to be relatively flat, averaging 1.64 MM b/d. Beyond September of this year propane production from natural gas processing will follow lower upstream activity and expected overall production declines. Propane production from natural gas processing is expected to decrease from approximately 1.63 MM b/d in October to the 1.5 MM b/d and the next trough expected in March-May 2021.

Total U.S. propane demand is expected to trough in May averaging approximately 1.88 million b/d, lower by approximately 40,000 b/d as compared to last month’s trend report. Total U.S. demand is forecasted to increase reaching a seasonal peak of 2.73 million b/d in January 2021. Correspondingly, IHS Markit’s current estimate of April 2020 propane inventory is 59.56 million barrels (27.1 days of forward demand). April is expected to be the trough, with total U.S. inventory slowly building and reaching 96.56 million barrels (42.9 days of forward demand) by October 2020, slightly higher when compared to last month’s trend report. PADD 3 inventory levels are now forecasted to be at or around the middle of the range of the 5-year average. Over the next few months, if actual propane exports are higher than our current forecast then Mont Belvieu propane prices will appreciate. IHS Markit’s current export estimate is approximately 1.23 MM b/d average from July through December 2020. The current Mont Belvieu average daily propane price for June 2020 was approximately 50 cpg, approximately 55% of the WTI crude oil price.