April 2020 Inventory Trends Full Report

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U.S. Exploration & Production Companies (E&Ps) continue to adjust to the significant crude oil supply overhang resulting from COVID-19 and the oil price war. During the month a significant milestone was achieved with U.S. President Trump brokering an international agreement to cut back global oil supply in collaboration with Saudi Arabia, Russia, and other oil-producing nations. Unfortunately, the agreement in principle will have a limited impact to the over-supply situation in the second quarter of 2020, but it does raise the prospects that global oil supply will be lower in the second half of 2020 and in 2021.

Even with full compliance to the crude oil production cuts and expected shut-in production elsewhere, the world is still looking at a several million barrel per day average liquids surplus over the next few months, translating to dramatic crude storage builds. The overall system is significantly constrained and has been reflected in near term daily crude oil prices. The U.S. crude oil benchmark price, the WTI Cushing Spot price, for example, fell precipitously from a pre-oil price war level of around $47 to very low levels, averaging approximately $16 per barrel daily for the month of April. The price decline has led to drastic reductions in upstream capital investment. Cuts are particularly severe, as noted, in North America E&Ps. Specifically, IHS Markit calculates that North American E&Ps will reduce spending by a collective 41% (around $27.7 billion) versus the previous year. By contrast, the rate of decline for E&P companies without a North American presence is only 4%. Meanwhile, big, multinational E&P companies (e.g. Shell, ExxonMobil) are cutting their collective spending by about 24% this year, with their North American operations bearing the brunt of the austerity.

All these cutbacks will drastically – and swiftly – curtail U.S. crude oil production and will correspondingly lower associated natural gas production and NGL production growth. These upstream cutbacks, along with changes in production of propane from the U.S. refinery system, will lower the prospects for propane production growth in 2020 and will likely result in an expected decline in propane production from entry to exit on a monthly basis for 2021. The U.S. propane production situation could change with the production decline being buoyed and reversed by a faster post COVID-19 demand recovery in late 2021 and 2022.

The COVID-19 virus is assumed to peak during the second quarter of 2020 but also to remain active around the world – potentially for a few years – until a vaccine is widely available and some immunity is gained within the world’s population. Correspondingly, global GDP is projected to fall by about 3% in 2020 versus 2019. The rebound in the manufacturing will likely be V-shaped owing to strong pickup of factory production and a possible release of pent-up demand for consumer durables. For the U.S., real GDP is projected to decrease 5.4% in 2020. IHS Markit does not expect GDP growth to turn positive until the fourth quarter of this year, reflecting our view that economic activity will not begin to improve materially until new U.S. cases of the COVID-19 virus are driven close to zero.

The U.S. propane market

Monthly U.S. propane production from natural gas processing has been hovering around 1.7 million barrels per day (b/d) since January, approximately 2.9 billion gallons per month. At the same time, monthly propane production from refineries has decreased by approximately 0.13 billion gallons per month. Domestic, non-chemical demand has troughed at approximately 0.5 billion gallons per month for April while chemical demand, domestic and exports, have stabilized at around 2.3 billion gallons per month. Chemical demand is expected to decline slightly as global chemical demand slows for the balance of 2020. Despite lower production from refineries, IHS Markit expects total propane inventory to start building during the month of May increasing from approximately 25 days of forward demand to approximately 42 days of forward demand in September. See the “Stocks” and “Days” tabs in the Propane Monthly Stock Report for the details.

Each U.S. PADD appears to be well supplied ahead of the upcoming winter season except PADD 2, the Midwest. The Midwest region’s inventory level has fallen below the 2019 inventory level on an absolute basis. Midwest propane inventory is expected to remain below the minimum inventory level for the rest of this year owing to lower expectations for propane production from natural gas processing and refineries.