August 2020 Inventory Trends Full Report

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Overall crude oil market backdrop and key messages

The global oil market has seen prices recover since the April low based on much improved market fundamentals and massive economic and financial support from monetary authorities in the United States, Europe, Japan, and Mainland China. More is needed. Mainland China’s oil demand during the 3^rd quarter 2020 will be higher compared to a year ago. At the global level August 2020 will be the 4^th consecutive month of rising demand, 89% of the level one year ago. But the rate of demand is slowing, as expected. Mainland China’s massive crude oil buying spree has waned. The surge in COVID-19 cases in recent months in the U.S., India, and Brazil points to the risk that the demand recovery could flatten – as it has for U.S. retail gasoline sales so far in August. Oil prices have recovered yet are still relatively low, pricing to the upside is expected but will take time. Assuming vaccines are proven effective within the next year and oil demand approaches pre-COVID-19 levels by late 2021, it is conceivable global crude oil prices will be near $60/bbl and higher.

The key messages for the global and North American crude oil markets are:

World oil demand in August is expected to be 13 million barrels per day (MM b/d) higher than in April,

The world oil market has shifted from a massive production surplus to a deficit leading to prices in the near-term range bounded between $40 and $50/bbl with upside potential,

Steep upstream operating company capital cuts and modest cost reductions point to tighter oil market fundamentals with global crude oil prices approaching $60/bbl in 2021,

Hurricane Laura threatens crude oil demand at a time when the U.S. crude oil system remains over-supplied,

S. crude oil production has bottomed with very little production growth expected until late 2021, and

S. upstream oil and natural gas operators have made tweaks and adjustments in recent weeks rather than dramatic changes in activity (reflected in rig counts) as WTI crude oil price stabilizes in the low $40s while Henry Hub natural gas prices strengthen.

The U.S. propane market outlook and expectations

Another month has passed, and changes are afoot and will impact IHS Markit’s forward view of U.S. propane fundamentals including supply, demand, and exports. Let’s first look at inventory levels and then discuss the U.S. propane market fundamentals gleaned in this month’s trend report.

U.S. propane inventory level projections for the remainder of 2020 on a monthly basis compared to last month’s trend report can be summarized as follows:

PADD 1 inventory level is expected to remain above the 5-year high and slightly above last year’s inventory level,

PADD 2 inventory level is expected to remain below the 5-year low generally speaking highlighted by inventory lower than last year’s level on a monthly basis through October and higher than last year’s level on a monthly basis for November and December,

PADD 3 inventory level is currently on par for August with last year but is expected to fall below the 2019 monthly level for the balance of the year, and

PADDs 4 & 5 inventory levels are well above the 5-year highs and are expected to remain at these elevated levels through year-end.

Total U.S. inventory level on a days of supply basis peaked in July at 43.7 days and is expected to slowly decline to 43.2 days in September before declining and troughing at around 30 days in the January through March 2021 time period, the end of the season. PADD 1 and PADD 3 inventory levels on a days of supply basis are each below 2019 levels owing to higher demand, namely exports, and lower supplies.

Overall U.S. propane supply has recovered faster than expected yet a decline from natural gas processing is projected. Part of the decline is expected to be offset by improving refinery throughputs on a go-forward basis. Total U.S. propane supply is expected to increase from around 2.1 MM b/d in August 2020 to 2.6 MM b/d in January 2021, and then slowly decline on a monthly basis to 2.1 MM b/d in July 2021. The current forecast incorporates the overall views of the supply sources including propane from natural gas processing and propane from refineries. A faster recovery resonates into the current forecast and total propane supply from all sources has been increased by approximately 30,000 b/d for July 2020 through January 2021.

Total U.S. propane supply from natural gas processing has been increased through October 2020 and decreased for November 2020 through June 2021 compared to last month’s report. Propane from natural gas processing is expected to decline in November and December 2020 before stabilizing in January and February 2021. Small increases in propane supply from natural gas processing are expected between November 2020 and July 2021 given IHS Markit’s view of upstream activity underpinned by the outlook for global crude oil and refined product demand. IHS Markit is forecasting propane from natural gas processing to increase by only 50,000 b/d between November 2020 and July 2021, roughly 5,000 b/d per month. The outlook could be relatively stable and propane supply from natural gas processing hovering around 1.54 million b/d (MM b/d) from November 2020 through July 2021. Comparing the current trend report to last month’s report PADD 1 and PADD 2 propane production from natural gas processing has been increased while PADD 3 propane production has been decreased.

Total U.S. propane supply from refineries has been increased over the forecast period, an average of approximately 25,000 b/d per month, given the U.S. refinery situation and less pessimistic as compared to previous forecasts. Total refinery propane production increases are the net result of increasing throughputs in PADD 3 and slightly lower throughputs in PADD 1 and PADD 2.

U.S. domestic demand expectations provides very few surprises as compared to history, and the heating season has started earlier this year as compared to last year with a possible peak in line with previous periods. U.S. export demand is another story and at times is a “push” of propane out of the U.S. system or a “pull” of propane from the U.S. system. U.S. incremental exports in the near term, above the volume to balance the market, are mainly driven by incremental capacity additions in Asia and the Middle East’s supply capability. Asia propane incremental demand is mainly met by the U.S. with small increments provided by the Middle East. Asia incremental demand for propane is contingent on the timely startups of mainly ethylene and propylene manufacturing plants in Mainland China. There are at least 4 ethylene and propylene projects expected to startup during the 3^rd and 4^th quarters of 2020, the sink for the incremental propane supplies. It is also interesting to note Mainland China’s refinery yields to propane have increased over the past few months and has partially offset U.S. propane exports. The refinery yield change is a result of refinery optimization and economics as refineries, if possible, can opt to produce less gasoline and jet fuel and more propane, butane and naphtha. This short-term trend and capability could wane over time as gasoline and jet fuel demand recovers.

The current Mont Belvieu average daily propane price for August 2020 was approximately 52 cents per gallon (cpg), an increase of 3 cpg over July. The U.S. propane market price remains on par with U.S. crude oil pricing for the month of August, remained in a narrow band and traded daily between 50% and 55% of the daily WTI crude oil price.