October 2020 Inventory Trends Full Report


Please log in to view this content.
You will be redirected back to this page.

Overall crude oil market backdrop and key messages

The pace of the world economic recovery and oil demand has slowed, if not come to a halt, at least temporarily.  This year oil prices, and the state of corporate oil revenue will all decrease significantly.  For the world, 2020 will go down as the most dismal since World War II.

But dynamism – change – in the oil market has not disappeared.  The contractions of 2020, including upstream investment, could set the stage for the return of $50/bbl and higher oil in 2021 and 2022.  Market downturns, like elections, have consequences. But so much depends on when COVID-19 is contained, and effective vaccines become widely available.  Mainland China, which has successfully contained COVID-19, reflects what could happen.  Mainland China is the only major market in the world where oil demand is above year-earlier levels.  Next year will be crucial.  IHS Markit assumes that effective vaccines will be available in mid-2021, which would then begin to pull oil demand off its current plateau and to higher levels.

But what if this does not happen?  New behaviors will emerge, and possibly limiting oil consumption and policy and technological change will be the enablers.  Some jurisdictions during the pandemic are advancing policies to further promote sales and use of electric vehicles.  For example, California’s governor signed an executive order banning the sale of oil-powered cars beginning in 2035.  COVID-19 could inadvertently be the tipping point for the energy transition.

Whatever the outcome of vaccine effectiveness and distribution, markets fuel dynamism and the global oil market is among the most nimble and dynamic of any in the world.  The level of oil consumption is a big uncertainty and while cold weather in large markets could lead to a global surge in COVID-19 cases in the coming months, ingenuity and urgency could lead to a solution.

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

  • More crude oil supply will come to the market outside of the OPEC+ agreement as the United States and Libya production rates have been revised upward by more than 1.0 million b/d (MMb/d) combined basis, while world oil demand for the fourth quarter has been revised downward by 300,000 b/d
  • A compounding possibility is a Biden victory and more oil from Iran
  • S. crude oil production has been more resilient, and wells thought to permanently shut have come back online, leading to a 2021 estimate reaching 11.2 MMb/d, compared to last month’s projection of 10.6 MMb/d
  • The current U.S. presidential election notes a “fork in the road”: Joe Biden and Donald J. Trump have divergent views on policies impacting the trajectory of U.S. oil demand and production. Biden has proposed a ban on new drilling permits on federal lands and waters while Trump could be expected to reduce regulatory impediments to new drilling and loosen vehicle fuel economy standards, and
  • The North American crude oil rebalancing act is in danger as the COVID-19 pandemic depresses demand, highlighted by lower stock drawdowns and persistently lower U.S. refinery operating rates; if not for a series of hurricane-related refinery outages in the Gulf of Mexico and restrained imports, stocks would likely already be headed higher.

The U.S. propane market outlook and expectations

The upstream supply situation is in flux given the crude oil market situation and U.S. propane production will likely be revised higher next month while demand will be ratcheted down from a lackluster showing of crop drying demand.  Next month’s trend report will incorporate a deeper dive into the U.S. upstream plays and basins, and implications to U.S. propane supplies from natural gas processing.

This month’s trend report was modified only in the front months calibrated to reported data, and daily and weekly data mined from IHS Markit’s information sources.  The modifications included updating actual, reported monthly data from the EIA for July, and estimates from various IHS Markit daily and weekly data sources for August, September, and October.  The slight modifications to these months were mainly reflected in lower production rates and lower inventory levels as compared to last month’s trend report and propagated through the forecast period.  In spite of these lower production and inventory adjustments in the current and forward months, the U.S. propane market appears to be relatively well supplied for the upcoming heating season.  U.S. propane projections for the remainder of 2020 can be summarized as follows:

  • PADD 1 inventory level in absolute terms is expected to fall below the 5-year average and correspondingly days forward demand is also slightly below 2019 levels for the balance of 2020, averaging 24.9 days for September through December,
  • PADD 2 inventory levels for September through December are expected to be above 2019 levels by approximately 3 days of forward demand averaging 81.7 days,
  • PADD 3 inventory level forecast for the balance of 2020 is on par with 2019, underpinned by resilient supplies supporting higher exports leading to an average of 37.4 days over September through December, and
  • PADDs 4 & 5 inventory levels continue to be well above the 5-year highs.

The current Mont Belvieu average daily propane price for October 2020 was approximately 52 cents per gallon (cpg) and 3 cpg above the September average.  The U.S. propane market price traded between 50% and 58% of the daily WTI crude oil price for the month of October, averaging 54% and slightly higher when compared to last month, as crude price weakened over the month compared to propane.