Oil Prices Bounce Back

Analysis from Fuels Market News indicates a strengthening market.

June 22, 2020

By Dr. Nancy Yamaguchi

ALEXANDRIA, Va.—Oil prices bounced back Friday after the prior week’s retreat as West Texas Intermediate (WTI) crude prices climbed to the $40 a barrel level. Crude and refined product prices trended up Friday. The prior week’s retreat was prompted in part by the official declaration by the National Bureau of Economic Research (NBER) that the U.S. fell into economic recession in February, a sobering assessment by the Fed of the “long road” to economic recovery, and an alarming uptick in new COVID-19 cases. Yet the economic re-opening is continuing, and consumers are pumping money into the economy. Retail sales jumped 17.7%, fuel demand rose, and last week brought a surprising drawdown from oil inventories.

Fed Chair Jerome Powell stated that the Fed was expanding the ways it could increase market liquidity. Markets surged, indicating that most investors feel comfortable with the Fed expanding its ability to intervene. Investors also remain optimistic about the prospects for another stimulus plan that would spend $1 trillion on infrastructure, chiefly roads, bridges, and the 5G network. China has promised to pick up the pace on its promise to purchase more U.S. agricultural products. Trading Friday was expected to be unpredictable, because of a quarterly event known as “quadruple witching.” But markets opened higher, and market bulls outweighed market bears.

U.S. Department of Labor weekly data show 1.508 million initial jobless claims for the week ended June 13, a decrease of 58,000 from the prior week. This news came as a disappointment, shaking faith in a speedy recovery. The prior week’s figure was revised upward from 1.542 million to 1.566 million for the week ended June 6. There have been over 48.1 million unemployment claims so far this year, more than 45.7 million of them in the 13 weeks since COVID-19 shelter-in-place orders were launched.

Global cases of COVID-19 have surpassed 8.5 million, with more than 450,000 deaths, according to the Johns Hopkins Coronavirus Resource Center. Confirmed cases in the U.S. have topped 2.1 million and death attributed to the disease have exceeded 118,000. Twenty-two states reported an increase in new COVID-19 cases. On the upbeat side, a clinical trial showed that dexamethasone (a common, inexpensive steroid) cut death rates by a third among the most severely ill patients.

Gasoline Prices

Gasoline futures prices surged to open at $1.2654 per gallon Friday on the NYMEX, compared with $1.1142/gallon on June 12. This was a major gain of 15.12 cents (13.6%). March brought a crippling collapse of nearly 87 cents per gallon, but prices gradually crept back up in April and May. U.S. average retail prices for gasoline rose significantly by 6.2 cents/gallon during the week ended June 15, after just last week reclaiming the territory above $2 per gallon. Retail prices averaged $2.098/gallon at the national level. Gasoline futures prices rose Friday, trading in the range of $1.26/gallon to $1.29/gallon.

Diesel Prices

Diesel opened on the NYMEX Friday at $1.201/gallon, a strong increase of 11.61 cents, or 10.7%, from the June 12 open of $1.0849/gallon. U.S. average retail prices for diesel rose by 0.7 cents per gallon during the week that ended June 15 to average $2.403/gallon. Diesel prices have weakened more or less steadily this year, but crude and refined product prices appear to be in recovery. Diesel futures prices rose Friday, and the week finished in the black.

WTI Crude Prices

WTI crude forward prices opened on the NYMEX Friday at $38.85 a barrel, compared with $36.26 a barrel Friday, June 12, when markets saw a price retreat, motivated partly by an uptick in coronavirus cases and cautions from the Fed warning of a “long road” to economic recovery. COVID-19 continues to spread, but there is hope for a treatment. The Fed also broadened its ability to intervene in the market. WTI prices traded Friday in the $39.00–$40.50 a barrel range.

Last week brought a surprising drawdown from oil inventories. The International Energy Agency (IEA) estimates that global oil demand will fall by 8.1 million barrels per day this year, but that demand will jump back by 5.7 mmbpd in 2021.

Oil prices were largely unfazed midweek when the American Petroleum Institute (API) released information showing an addition of 3.9 mmbbls to crude oil stockpiles. The API also reported additions of 4.3 mmbbls to gasoline inventories and 0.919 mmbbls to diesel inventories. The API’s net inventory build was a significant 9.119 mmbbls. Market analysts had predicted builds of crude and diesel stocks but a drawdown from gasoline stockpiles.

Prices rose last Wednesday when U.S. Energy Information Administration (EIA) official statistics reported a much more bullish picture. The EIA reported a much smaller addition to crude oil stockpiles of 1.215 mmbbls, more than outweighed by stock drawdowns of 1.666 mmbbls of gasoline and 1.358 mmbbls of diesel. The EIA net result was an inventory draw amounting to 1.809 mmbbls. Crude oil inventories have expanded in 18 of the 23 weeks since the first week of January, sending a total of 112.32 mmbbls of crude oil into storage. The volume of crude flowing into stockpiles has slowed over the past month, however, as production is being cut and demand is picking up.

During the worst of the oversupply, the EIA reported that crude oil in storage at Cushing rose from 35,501 barrels during the week ended January 3, 2020, to 65,446 barrels during the week that ended May 1, 2020, an increase of 29,124 barrels. Cushing stocks steadily have been drained since then, falling to 46,836 mmbbls during the week ended June 12. Some surplus crude is being stored in the National Strategic Petroleum Reserve (SPR.) The EIA reports that SPR additions were made in the weeks that ended April 24 (1.150 mmbbls), May 1 (1.716 mmbbls), May 8 (1.933 mmbbls), May 15 (1.882 mmbbls), May 22 (2.111 mmbbls), May 29 (4.02 mmbbls), June 5 (2.22 mmbbls), and June 12 (1.731 mmbbls), Current SPR stocks are 651.730 mmbbls.

U.S. crude production continues to decline. The EIA reported that U.S. crude production during the week ended June 12 declined to 10.5 mmbpd, down 0.6 mmbpd from 11.1 mmbpd the prior week. According to the EIA’s weekly data series, U.S. crude production averaged 13.025 mmbpd in February, the highest total ever. Production fell to 12.25 mmbpd in April, 11.52 mmbpd in May, and 10.8 mmbpd during the first two weeks of June. The EIA has revised downward its forecast of 2020 production, cutting it to 11.56 mmbpd. However, the forecast of demand has been cut as well, leaving a supply overhang.

Editor’s Note: This column is abridged from the original, which appeared in Fuels Market Watch Friday Edition, a NACS affiliate. See the full column and charts here.

Dr. Yamaguchi is President of Trans-Energy Research Associates, a computer-oriented firm specializing in advanced analytical techniques in energy issues. She is a senior market analyst and contributing editor to FMN Media. Her work focuses on domestic and international energy markets, covering a wide spectrum of supply, demand, trade and pricing issues.