July 2020 Inventory Trends Full Report

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As backdrop, the IHS Markit forecast for global and U.S. crude oil outlook remains mostly unchanged from the previous month. The primary change is a revision to 2021 U.S. production adjusting for a tempered estimate of how much production will be permanently shut-in and the rate of a production recovery.

Risks remain including the rate of new COVID-19 cases across the globe. Cases have increased in the United States, but also Brazil, Indonesia, Mexico, Nigeria, the Philippines, and South Africa. Total oil demand in these countries in 2019 added up to about 34 million b/d (MMb/d) – a little over one-third of the world total. The recovery of refined product demand has been mixed as expected. The recovery of U.S. gasoline demand – which alone accounts for 10% of world oil demand – has recently stalled, at least for a time, as California, Texas and Florida – the three most populous U.S. states – account for much of the increase in U.S. COVID-19 cases. Some previously lifted restrictions on commerce have been reinstituted.

At the same time, both mainland China and the United States have staged military exercises near Taiwan. And on 13 July, President Trump’s administration explicitly stated that the United States, for the first time, “rejects” mainland China’s territorial claims in the South China Sea. The U.S.–mainland China rivalry has intensified, and their leaders are likely to avoid outright military hostilities, but in a tumultuous U.S. presidential election year, we might see extraordinary developments.

But all is not gloomy. New COVID-19 cases are declining in Europe and remain very low in mainland China and South Korea. And even with the rise in U.S. cases, there has not been a commensurate increase in deaths. World oil demand in June was nearly 9 MMb/d higher than in April. The U.S. Federal Reserve’s $3 trillion worth of economic support since the beginning of March—roughly equivalent to last year’s economic output in France—has fueled gains in financial markets including in oil futures, as investors look for higher returns in a very low interest rate environment.

OPEC+ members are preparing a production increase beginning in August. Even with this increase, IHS Markit’s global oil balance shows a supply deficit (excluding any inventory changes) for the third and fourth quarters of 2020—a factor that will support oil prices. IHS Markit does not anticipate the oil demand recovery to go in reverse, although the risk of that happening—or demand gains slowing below our expectations—is higher now than a month ago. Also, there is a billion-barrel-plus crude oil inventory overhang that will dampen upward price pressure.

Speculation has grown about the possibility of very high oil prices in the coming years; such talk occurs after every oil price collapse. The IHS Markit base case projects a significant price recovery toward an annual average of Dated Brent near $50/bbl in 2021 (and close to $60/bbl in 2022). A key factor is the steep decline in upstream spending, while we expect only modest reductions in upstream costs. This dynamic points to weak supply growth. The current situation is unlike 2014–16, when costs fell as spending tumbled. There simply is less fat to cut this time around.

The demand recovery is the lead actor. Oil demand is well above the low of April, even though COVID-19 cases are still on the rise globally—the first wave is not over. Can world demand continue to rise if COVID-19 cases continue to increase in key markets? As we begin the second half of the year, the experience of the past month is a reminder that we will be living with COVID-19 for some time.

In the U.S. crude oil market uncertainty is afoot. The potential court-ordered shutdown of the 570,000 b/d Dakota Access Pipeline (DAPL) could have a major impact on Bakken oil transportation, pricing, and potentially supply. Alternative routes are possible including rail, and rail will need to take up much of the slack, but it is unclear how quickly railroads can ramp up. Bakken producers would likely have to accept lower wellhead prices applying further pressure on slowing activity including hesitating to reactivate shut-in wells. Production challenges remain but it appears U.S. crude oil production has bottomed, at least for the time being, and is finding some support from returning shut-in volumes. At the same time, the demand recovery appears to be decelerating, noted above, and potentially declining. U.S. crude oil exports have declined, owing to still-depressed international demand. The combination of these factors, along with the end of the Strategic Petroleum Reserve (SPR) fill, will maintain pressure on the U.S. crude oil system in the next few weeks. Crude oil inventories remain at record highs.

IHS Markit’s updated view is United States crude oil production will decline in 2020, flatten by the first quarter of 2021, and then slowly rise while OPEC output is set to rise for the latter part of this year and in 2021.

Revising U.S. crude oil production slightly upward and the expected 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, but the demand situation is fluid. Incremental Chinese chemical plant capacity additions planned for June 2020 and further into 2021 have been delayed, providing relief to U.S. exports to balance.

The U.S. Propane Market

Over the past month U.S. propane supplies have followed both U.S. crude oil production rates and refinery operating rates. Reductions in propane supplies have been less pronounced as compared to crude oil. U.S. crude oil production cuts were deeper than expected for May and June, but the recovery has been higher than expected, buoyed by a stabilized crude oil market price. This has translated into a somewhat muted reduction and a stronger recovery in propane supplies from natural gas processing. Refinery operating rates have improved, albeit remain low compared to pre-COVID-19 levels.

The combination translates into total monthly propane production supplies reaching a trough in May 2020 (as reflected by EIA reported data), approximately 1.97 MMb/d, and then stabilizing, with some ebbs and flows on a monthly basis through June 2021. IHS Markit forecasts total monthly propane supplies averaging 2.25 MMb/d over the upcoming 12-month period. It is interesting to note, seasonal increases in refinery throughputs over the next 6 months provide monthly supply uplifts. These seasonal increases provide the only upside movements to the propane production outlook over the next 12 months.

For the fourth quarter of 2020 the forecast for propane exports has been reduced given the delay in startup of Chinese capacity additions. OPEC+ and Middle East crude oil production increases will improve global propane availability. Chinese incremental demand is met by the U.S. and the Middle East, and the share of supplies from the Middle East to China, increasing as a function of increasing crude oil production rates. The delays in Chinese demand and the increases in Middle East supplies lead to tempering U.S. exports as compared to the previous trend report. The monthly export rates have been reduced by approximately 0.1 MMb/d for November 2020 through June 2021. U.S. monthly exports are expected to average 1.1 MMb/d through December 2020 and averaged 1.2 MMb/d through June 2021.

Total U.S. propane demand for May was approximately 80,000 b/d higher than expected, estimated by the EIA at 1.98 MMb/d. Total U.S. demand is forecasted to increase going forward on a monthly basis reaching a seasonal peak of 2.58 million b/d in January 2021, nearly on par with the previous trend report. Correspondingly, IHS Markit’s current estimate the June 2020 propane inventory is 76.5 million barrels (38.5 days of forward demand) rising to approximately 95.0 million barrels (44.8 days of forward demand) by September 2020, slightly lower compared to last month’s trend report. PADD II inventory levels for September 2020 are below last year’s level, lower by approximately 4.6 days and continues to highlight a potential supply and logistics issue. PADD III inventory levels have been adjusted lower on a forward days of supply basis for the forecast period, June 2020 through June 2021. The days of forward supply have been reduced on average by 4.4 days. The average days of forward supply for this period is estimated at 31.1 days.

The current Mont Belvieu average daily propane price for July 2020 was approximately 49 cpg, approximately 50% of the WTI crude oil price. The monthly price remained almost unchanged from last month but weakened on a crude oil basis by approximately 5%. Daily Mont Belvieu propane prices continued to track the crude values, but the weaker average propane-to-crude ratio coincided with firming weekly propane production rates.