Oil Market Volatility at an All-time High; Inventories Rising

Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the coronavirus and a sudden increase in crude oil supply following the suspension of agreed production cuts among OPEC and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate fell from a year-to-date high closing price of $63.27 per barrel on January 6 to a year-to-date low of $20.37/b on March 18, the lowest nominal crude oil price since February 2002, the Energy Information Administration, the statistical arm of the U.S. Energy Department, said March 25.

The International Energy Agency, meanwhile, on March 9 suggested that worldwide gasoline demand could drop by about 90,000 b/d because of the coronavirus, a figure that some analysts are saying is too conservative. Still, that compares with IEA’s prediction in December that demand would grow by 900,000 b/d.

A recent estimate by IHS Markit suggests that we might be in for a bigger shock. U.S. gasoline consumption could be off 55% for March and April due to COVID-19, IHS Markit suggests. The analyst predicted jet fuel demand would be halved and diesel demand down by 20% over the same period.

If the IHS numbers are correct, then COVID-19 would result in US demand for crude oil dropping to 12.5 million b/d -- a drop of a whopping 8 million barrels per day of crude oil, or 8% of global crude production.

Refiners will shift outputs to attempt to match market demand. Since diesel demand is least impacted because of its use in freight transport, refiners will likely shift to diesel production, which could slow the crude oil demand drop. This likely will be accompanied by a rapid growth of inventories for gasoline and jet fuel, at rates of 30% to 35% of average daily consumption accumulating in storage tanks, said Ramanan Krishnamoorti, Chief Energy Officer of the University of Houston’s Energy Fellows, in Forbes.

Except for China, the rest of the world’s economy, notably Western Europe and to a lesser extent South Korea and Japan, is under similar stress as the U.S. economy. China has started to slowly recover after four months of economic pain. Given that, we anticipate that world demand for crude oil is probably down more than 10 million barrels per day, or down more than 10% from last year’s average consumption and production, Krishnamoorti said. The additional amount of crude being added into the market by Saudi Arabia and Russia will exaggerate this oversupply. The inventory of crude and refined products will continue to grow, so this oversupplied situation will persist for months after we have overcome the COVID-19 crisis, he added.