September 2020 Inventory Trends Full Report

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Overall crude oil market backdrop and key messages

Global crude oil demand growth is slowing post collapse, lending to an expected plateau. The demand plateau – approximately 94 MMb/d – is expected to continue over the next two quarters as air travel will continue to be subdued until COVID-19 is contained and effective vaccines become widely available. Plateauing demand overall may not necessarily lead to stable crude oil prices like those experienced over the past two months. Crude oil demand collapsed and recovered at different time periods and there are some demand sinks worth noting. Mainland China’s oil demand is now above the year-earlier level and while demand has risen nearly everywhere since April, including in Europe, Asia (outside of Mainland China), and North America but still well below year-earlier levels.

U.S. oil production is proving to be more resilient compared to last month’s projection. To be sure, on a quarterly average basis, U.S. output has fallen more than anywhere in the world since the first quarter of 2020, down 2.1 MMb/d as of the third quarter. This decrease is even more than in Russia and Saudi Arabia, where governments ordered cuts. IHS Markit pegs third-quarter U.S. crude oil production at 10.6 MMb/d, an upward revision of 440,000 b/d relative to last month’s estimate. The upward revision is underpinned by more-than-expected shut-in production coming back on stream in June and July, supported by higher prices realized in April and May, with price being the de facto regulator of U.S. crude oil production. The 2021 U.S. crude oil output projection is also revised upward by 550,000 b/d. These increases will lead to higher propane production rates from natural gas processing.

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

Shifting financial market sentiments (news and expectations about vaccines, the Chinese economy, the U.S. election, and financial market trends) will buffet prices on the oil demand plateau;

Global oil inventories are high and will remain high in 2021;

Saudi Arabia and Russia remain aligned to support prices as disbanding OPEC+ could launch a market share war with the backdrop being higher U.S. crude oil production rates and lower Saudi Arabia and Russian production rates expected;

The U.S. crude oil production decline is shallower than expected but less drilling means no growth (considered and including our upward revisions noted earlier) – the number of focused drilling rigs in the U.S. in the first half of September stood at 180 rigs, down from 733 rigs a year ago; and

Conditions are leading to supply deficits in 2021 and beyond, especially if upstream spending falls short of expectations.

The U.S. propane market outlook and expectations

U.S. propane fundamentals have been very interesting this month, with higher than expected production rates and hurricane-related demand decreases leading to improving inventory levels in absolute terms and on a days of supply basis as compared to last month’s trend report.

U.S. propane inventory 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;

PADD 2 inventory level outlook has improved and is expected to remain above the 5-year high, supported by higher production and lower demand reflected in increasing stock builds over the past few months;

PADD 3 inventory level forecast for the balance of 2020 is slightly higher and increased around 2 days of supply resulting from production outstripping demand, lower exports related to impacts from Hurricane Laura and Hurricane Beta; and

PADDs 4 & 5 inventory levels are mostly unchanged and well above the 5-year highs.

Total peak U.S. inventory level has slid forward, and the new peak is September as compared to July predicted in last month’s trend report. September’s days of supply has improved by 6 days and is now estimated at 49 days. The inventory situation for the balance of 2020 and through August 2021 has improved by approximately 2 days yet below last year’s level over the same time period by approximately 3 days. Higher waterborne exports from PADD 3 are likely given the uplift in the outlook for propane production from natural gas processing. PADD 2 inventory situation has also improved as compared to last month, with inventory building ahead of upcoming seasonal demand increases.

The story is the similar this month as compared to last month from a production perspective, with additional upside production rates becoming a likely reality. Overall U.S. propane supply has recovered faster than expected yet a decline from natural gas processing and production rates post recovery are slightly higher than originally forecasted.

Early indications suggest that crop drying demand will be below on average as the crops are planted early. Although crop harvest is expected to breach records, heating demand will be lower as there is ample time for the crops to dry naturally. The Midwest, which had below average inventory levels in May –June, has built inventory in the last two months. The positive price differential between Conway and Mont Belvieu propane, and better than anticipated production of field propane, resulted in propane inventory build in Mid-Continent. However, with expected production declines and increasing demand, and inventories to drop below the 5-year average, prices will elevate from current levels.

The current Mont Belvieu average daily propane price for September 2020 was approximately 49 cents per gallon (cpg) and 3 cpg below the August average. The U.S. propane market price remained in a narrow band and traded daily between 49% and 56% of the daily WTI crude oil price for the month of September, averaging 52%.