The oil market has been topsy turvy lately, and last week was no exception. Friday’s subdued finish masked what was a lively week as prices rebounded strongly from a sharp drop in the prior seven-day period. Initial support came courtesy of weather-related supply disruptions on the other side of the Atlantic. Hurricane Sally barrelled through the US Gulf of Mexico and took more than a quarter of output in the region offline. But just as crews began returning to US offshore rigs and the hurricane premium started to ease, OPEC+ stepped in to provide a hefty dose of bullish impetus.
The producer alliance’s monitoring committee gathered for its latest monthly review and announced steps to address market weakness. These included keeping non-compliant members in check and extending the period of overcompensation until December. What is more, Saudi Arabia’s energy minister hinted at a potential extraordinary meeting in October if prices weakened further. As if for good measure, he also fired a shot at speculators, warning them not the bet against oil market. In effect, the OPEC+ leadership has put a $40 floor under oil prices.
Small wonder, then, that Brent and WTI racked up solid gains last week. The former rallied $3.32/bbl over the period with a close at $43.15/bbl while the latter finished $3.78/bbl higher at $41.11/bbl. Furthermore, the prompt timespread contango on both crude benchmarks narrowed slightly. As encouraging as this may be, further upside will likely be hard going in the near term. For starters, the prospect of Libyan oil barrels hitting the market took a big step to becoming reality on Friday. Libyan commander Khalifa Haftar said his forces have decided to resume oil production. The country’s NOC swiftly lifted the force majeure on selected oil exports but left it in place on facilities where fighters remain. Needless to say, the ending of a months-long blockade of Libya’s oil facilities will act as a drag on the oil rebalancing.
All the while, intensifying demand jitters are casting a widening shadow over the oil market. A consensus is emerging that the fuel demand recovery will shift down a gear in the winter months as global COVID infections continue to rise. The ongoing failure to contain the pandemic is hardly conducive for a sustained price recovery. Accordingly, last week’s rebound should be taken with a pinch of salt. The fact remains that demand concerns will sooner or later come back to bite oil bulls.
Goodbye driving season
This recent passing of the Labour Day weekend signals the end of the US summer driving season. And what a tumultuous period it’s been for gasoline demand. After plunging to a record low in March, consumption rebounded from mid-April to late June as lockdowns were ease. The recovery, however, began to sputter in July and August in what is the usual annual high point for gasoline demand. It even turned negative in the last full week of August and this weakness has been carried over into this month. The four-week rolling average for the period ending September 11 shows the thirst for gasoline resting around 800,000 bpd below prior-year levels.
This counter-seasonal retreat in US gasoline demand comes in spite of a favourable price backdrop. Average gasoline prices have stayed relatively flat through July and August, with prices around 18% lower than those at the same time of 2019, the EIA said. Moreover, prices at the pump ahead of the Labour day weekend stood at the lowest level for this time of the year since 2004.
Yet historically low prices have been dwarfed by the ongoing impact of the coronavirus pandemic and travel restrictions. COVID is the single biggest influence of US fuel demand and cases are rising in many parts of the country. Consequently, a big swathe of the population is still being forced to stay at home thereby hampering the fuel demand recovery. All the while, heightened unemployment is also contributing to sluggish gasoline demand. Employment levels and fuel demand share a strong connection and, worryingly, the US labour market recovery has hit a snag of late. The number of people filing jobless claims remains painfully high and points to ongoing job lay-offs. A significant turnaround for America’s joblessness seems unlikely in the absence of fresh support from Washington.
And there is more reason to fret. This is because the stalled US gasoline demand recovery comes at an ominous time. The start of autumn marks a seasonally weak period for consumption. Shorter days and fewer vacations mean that less miles are driven. Add to that the COVID factor, and a further decline in gasoline demand in the medium-term is guaranteed. The upshot is that we are likely to see a shift from inventory draws to builds. US gasoline stocks have trended downwards since hitting a record 263 million bbls in mid-April, according to EIA data. They declined in all but five of the last 21 weeks by a cumulative 32 million bbls and brought inventories to within a whisker of the five-year norm. Now though, with demand set to drop further, stocks will pile up in the coming quarter. Excess US gasoline inventories are therefore set to become the norm again. This, in turn, will heap more pressure on already struggling refining margins. The August monthly average RBOB-Brent gasoline crack spread remained lower than the five-year average for the sixth consecutive month, says the EIA.
To little surprise, the recent loss of momentum in US gasoline consumption has pushed forward the demand timeline of recovery. In its latest forecasts, the EIA said demand for the fuel will average 8.27 mbp this year, 90,000 bpd less than a previous estimate. The growth outlook for 2021 was also downgraded and is poised to remain below the 2019 level. Simply put, US gasoline demand is far from a return to pre-virus normalcy. What is needed above anything else for the US gasoline recovery to get back on its feet is the deployment of an effective COIVD-19 vaccine. Gasoline bulls will be putting this at the top of their Christmas wish list. However, despite Donald Trump’s claims, the odds are that they will be left disappointed. This leaves the US gasoline patch facing a prolonged period of rising stocks and lacklustre margins.