May 2020 Inventory Trends Full Report


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First came the largest and fastest oil demand collapse in history. Now the largest oil production cut ever is unfolding at light speed and nowhere is production being cut as much as in North America, specifically the U.S. The U.S. crude oil system appeared to be confronted with a significant supply and demand mismatch and the possibility of limited storage, and if crude oil storage is not available, then production will halt. The rate at which the U.S. production cuts occurred over the past month, and lower refined product demand, has alleviated the possibility of a crude oil storage containment issue. As U.S. and global crude oil supply has rebalanced to a lower level of demand, signs point to April as being the bottom of the crude oil demand collapse. This situation sets the stage for the possibility of crude oil supply deficits in second half 2020, assuming Saudi Arabia and Russia do not surge production.  The nascent crude oil market demand recovery is still vulnerable to concerns about the rate at which people circulation recovers, the drawdown of inventories, the possibility of further COVID-19 outbreaks, and high levels of unemployment. The U.S. crude oil production cuts have impacted the outlook and forecast for U.S. propane production and inventory levels.

The U.S. propane market

The U.S. crude oil production cuts have impacted the overall U.S. propane balances with the most noticeable impact being PADD 3. U.S. monthly crude oil production has fallen from a peak of 12.8 million barrels per day (b/d) in February, to approximately 11.0 million b/d in May, with most of the cuts taking place in the Permian basin. U.S. natural gas production has decreased along with natural gas requiring processing for the recovery of propane. Decreasing U.S. propane supplies have come at a time when propane demand is mostly characterized by seasonal demand, which has masked the impact to some degree. But the production cuts were deep and with relatively normal demand inventory levels are falling and will fall further. The crude oil production deep cuts and lower propane supplies have also lowered the forecast and outlook for total U.S. propane inventory levels compared to last month’s report. The current forecast and outlook projects 2020 inventory levels to be lower than 2019 at and around the middle of the 5-year range.

U.S. propane production from natural gas processing has followed crude oil production cuts, falling from approximately 1.67 million b/d to 1.65 million b/d between February and May 2020. At the same time, U.S. propane from refineries has fallen from 0.51 million b/d to 0.46 million b/d. Total U.S. propane supplies including imports and inter-PADD transfers has fallen from around 2.46 million b/d to 1.93 million b/d over the same period.

PADD 2 and PADD 3 propane from natural gas processing will decline most sharply over the next three months and PADD 3 will continue to decline for the balance of 2020 and further into 2021. A similar pattern is expected for PADD 4 but to a lesser extent. U.S. propane production from natural gas processing will continue to fall with most of the declines expected in PADD 3, underpinned by production cuts and lower drilling activity in the Permian basin. As U.S. propane production from natural gas processing falls, an upturn in downstream refined product demand will support increasing refinery throughputs and incremental propane production. U.S. propane production from refineries will soon pass through a trough, expected in June, and will increase, but production from refineries will be below monthly production rates realized in 2019, lower by approximately 40,000 to 50,000 b/d.

Total U.S. propane demand is expected to trough in May, averaging approximately 1.93 million b/d.  Total U.S. demand is forecasted to increase, reaching a seasonal peak of 2.75 million b/d, slightly above demand for the same time last year. Correspondingly, IHS Markit’s current estimate for the April 2020 propane inventory is 59.98 million barrels (26.8 days of forward demand), slightly below the EIA’s reported inventory level for March 2020. April is expected to be the trough, with total U.S. inventory slowly building to reach 90.37 million barrels (40.2 days of forward demand) by October 2020.  PADD 3 inventory levels are now forecasted to be at or around the middle of the range of the 5-year average.  The outlook and forecast for PADD 2, the Midwest, inventory level is low in relative terms as compared to 2019 and the 5-year average.  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.