Oil prices have been rangebound hovering between $40 and $43 for the past two months with little bullish or bearish sentiment to drive the price higher or lower. Despite a large drop in production and a sharp decline in stockpiles, oil prices continue to trade sideways. The current production levels in the US are the lowest seen in approximately a decade, dropping by more than 4-million barrels a day since the highs hit before the onset of COVID-19.
Recent Drivers
Prices have been buoyed but have not climbed during the last week of August and the first week of September in the wake of Hurrican Laura which hit Lake Charles Louisiana and generating a shut-in of more than 50% of the oil generated in the Gulf of Mexico. In the United States, oil production has declined by more than 3-million barrels a day dropping from more than 13-million barrels a day of production down to 9.7-million barrels a day. In the week ending August 28, US production dropped by more than 1.1 million barrels a day due to the inability of production to proceed as the storm swirled in the Gulf of Mexico. The storm knocked out approximately 50% of oil production in the Gulf of Mexico and nearly 15% of the refining capacity that operates in the United States.
Big Stockpile Decline Fails to Buoy Prices
Following the storm, the statistics reported by the Energy Information Administration (EIA) appeared to be one of those “sell the fact” scenarios. While prices never surged out of their recent range, they did selloff despite larger than expected draws in inventories.
According to the EIA, crude oil stockpiles declined by a larger than expected 9.4 million barrels in the week ending August 28. Despite the large decline, stockpiles remain approximately 14% above the five year average for this time of year. This is because there has been a lack of demand for travel especially air travel due to the pandemic. Additionally, gasoline inventories declined by 4.3 million barrels in the week ending August 28, which places gasoline inventories about 4% above the five year average for this time of year. Lastly, distillate fuel inventories, which include products such as diesel and heating oil decreased by 1.7 million barrels in the week ending August 28, which places stockpiles about 23% above the five year average for this time of year.
Demand Remains Subdued
While people in the US have been getting back out on the roads, demand for motor gasoline and air-travel has been much lower than in previous years. According to the Department of Energy total demand for oil products is 18.3 million barrels a day, down by 15.9% from the same period last year. Gasoline demand stood at 8.9 million barrels a day, down by 8.9% from the same period last year. The biggest issue is that Jet fuel demand was down 47.1% compared with the same period in 2019.
Additionally, the amount of crude oil that has been imported as well as used by refineries is down. According to the Energy Information Administration, inputs into refineries averaged 13.9 million barrels per day during the week ending August 28, 2020, which was down 0.8 million barrels per day. Refineries operated at 76.7% of their operable capacity last week, also down.
The decline in US oil stockpile wan not only a function of the decline in oil production in the US. Imports were also down. The EIA reported that crude oil imports averaged 4.9 million barrels per day in the week ending August 28, which was a decrease of 1.0 million barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 5.5 million barrels per day, 20.2% less than the same period in 2019.
The Bottom Line
Oil prices have rebounded significantly from the lows seen as COVID-19 spread across the US. At one point WTI crude oil printed a level of -37-dollars. The current reading of $42 is more than double that level but is still well off the levels seen in February before the spread of the pandemic. The lack of demand especially in air travel has hindered the rebound in oil prices.
The supply side has been shocked by Hurricane Laura, which reduced production by more than 50% in the Gulf of Mexico. US refinery production was also curtailed falling by 15%. Inventories fell more than expected but this appears to be priced into the commodity trading of oil and gasoline.
Imports ralso declined, but the lack of demand which is still down nearly 16% year over a year appears to be overriding the lack of supply that is coming into the US and the decline in production which is down by more than 3-million barrels a day since the highs seen in February of 2020.
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