Hurricane Laura did its last blast of damage to oil and product prices as a drop in demand overshadowed massive reductions in supply, causing the trade to go into shoulder season mode and take cover ahead of the Labor Day holiday weekend. The Energy Information Administration (EIA) report, while reporting stunning drops in supply, also showed a hit to demand, and the reduction in inventories is being attributed to a hurricane Laura once-off drop. September, historically tough for oil, has so many hedge funds and traders already off to the beach as refiners slow down, and winter is still hopefully a few months away. Hurricane Laura was the official start of the slow shoulder season.

Though hurricane Laura stopped demand in its tracks, the EIA reported a sharp 2.45 million barrel a day drop in domestic demand for all petroleum products. The market can’t think ahead to the fact that demand will recover, and then some. Yet that is a problem for later in the month when refiners start to ramp up again, or at least until traders gets back from their vacations and get the kids in school or on Zoom.

Even the massive 9.4 million barrel drop in U.S. crude supply that would have been larger without a 1.3 million barrel release from the Strategic Petroleum Reserve, was enough to overcome the demand drop fears. Gasoline supply dropped by 4.3 million barrels in a disturbing trend that suggests that gasoline prices will go up from this point as supplies start to get closer to the five-year average.

The EIA says that distillate fuel inventories decreased by 1.7 million barrels last week and are about 23% above the five year average for this time of year. One of the weak spots globally for distillate demand has been jet fuel. The plane has been trodden and not because it was foggy outside. The world has been grounded. Yet the  EIA says that, “analysis of flight-level data provided by Cirium on commercial passenger flights—a category of aircraft that the U.S. Energy Information Administration (EIA) estimates accounted for 73% of total U.S. jet fuel consumption in January 2020—suggests that demand for jet fuel in the United States has, so far, recovered faster than in many other major aviation markets.

EIA estimates that as of August 16, 2020, consumption of jet fuel by U.S. commercial passenger flights was approximately 612,000 barrels per day (b/d), 43% of the estimated amount consumed on the same date one year earlier. This estimate is considerably higher than the estimate of jet fuel consumption compared with year-ago levels as of August 16, 2020, from Europe (36%), the rest of Africa (31%), the Middle East and North Africa (30%), the rest of Asia (28%), and in the rest of the Americas (24%). Relative jet fuel consumption in China (including its Special Administrative Regions Hong Kong and Macau) was, however, higher in August; China consumed 60% of the amount used in the previous year.

Oil also got hit on concerns about OPEC Plus unity. Iraq later denied reports that it wanted a waver on cuts. They say they are still committed to cuts.

Remember in the last decade that we complained about the lack of refining capacity? We need to build more refineries because it was driving prices up. Then Exxon Mobil C.E.O Lee Raymond said that prices would have to double from those prices for him to want to build a refinery because of the nature of the business. Well, it looks like Mr. Raymond was right. We now have excess refining capacity. The Wall Street Journal reports that we have a glut of refineries. This year’s oil glut is already receding. It is a shame that can’t be said of the global glut of oil refineries, which is only getting worse.

Europe in particular has long had too many oil refineries, but the pandemic-induced fall in energy demand has ramped up pressure to resolve the problem. For the region’s big oil producers—already reeling after a flood of excess oil pushed some prices below zero in April—there are a few aging assets likely in line for a makeover. Others could be destined for the scrap heap.

Refineries buy oil to process into gasoline, diesel, jet fuel and other products. Most output is easily shipped, so competition is global as well as regional. Historically, developed-market refiners supplied developing nations, but recently the latter have built their own facilities, creating excess capacity. A must read!
Thanks,
Phil Flynn

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