[Editor’s note: Opinions expressed by the author are their own.]
U.S. petroleum consumption has started to rise as the economy emerges from lockdowns imposed to control the spread of the new coronavirus, giving the oil industry hope it has come through the lowest point in the cycle.
Similar recoveries in fuel consumption are expected at varying rates across the other major economies as they gradually emerge from lockdown and are likely to push the oil market into supply deficit in the third quarter.
In most cases, the recovery in petroleum demand is expected to be led by middle distillates, as the manufacturing, construction and freight transportation sectors return to work.
Gasoline consumption will increase, with some diversion of travel from public transport to private motor cars for health reasons, but with the overall gain limited by the loss of leisure-related travel.
But jet fuel use is likely to remain depressed for an extended period, as continued quarantines and pressure to introduce social distancing on flights prevents the sector struggles from resuming meaningful schedules.
The result will be an increase in relative demand for light distillates (gasoline) compared with middle distillates (diesel but especially jet), which the refining system will have to accommodate.
In the United States, the total volume of petroleum products supplied to the domestic market averaged 16.8 million bbl/d last week, estimates from the U.S. Energy Information Administration found.
The volume of products supplied is up by around 3 million bbl/d compared with early April, though still running around 5 million bbl/d below pre-lockdown rates).
In many states and counties, stay-at-home orders have been relaxed, with more businesses re-opening and an increase in the number of car journeys, which is propelling a significant increase in gasoline consumption.
Gasoline supplied has now risen by more than 2 million bbl/d since early April, though still another 2 million bbl/d below pre-lockdown rates.
The gradual resumption in industrial activity and freight movements is also driving a rebound in the consumption of middle distillates, such as road diesel. Distillate supplied has risen by around 1 million bbl/d since early April, and is running at just 500,000 bbl/d below pre-lockdown rates.
But the passenger aviation sector shows no sign of recovering, with most scheduled flights cancelled and aircraft grounded.
Jet fuel supplied has fallen to less than 0.4 million bpd, one-quarter of the pre-lockdown rate, with no sign of recovery since early last month.
In the week ending May 8, jet fuel consumption was down by around 80% from pre-lockdown levels while gasoline consumption was down 24% and distillate consumption was down by less than 5%.
If the major economies continue their progressive exit from lockdown, the decline in global oil consumption should be down to 12-15 million bbl/d by the end of June from as much as 25-30 million bbl/d in early April.
By the start of July, global oil consumption should exceed production, assuming OPEC+ members continue to restrain their output and U.S. shale production continues to decline as a result of low prices.
In this scenario, global petroleum inventories will peak in the second quarter, and start to draw down significantly during the third quarter.
Traders' expectations that inventories will fall have already driven a sharp narrowing in the calendar spreads for the third quarter.
Brent's spread for the three months from July to October has shrunk to a contango of $1.60/bbl from more than $6 in the middle of last month.
For now, oil looks as if it has come through the trough of the cycle and a gradual recovery is in prospect, provided there is no second round of lockdowns and rising prices do not tempt oil producers to increase their output.
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