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Petroleum & Other Liquids

This Week in Petroleum

Release date: October 21, 2020  |  Next release date: October 28, 2020

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Crude oil tanker rates likely to remain low until petroleum demand increases

In March and April 2020, the reduced demand for crude oil and petroleum products because of responses to COVID-19 led to a sharp increase in global crude oil inventories. As onshore inventories increased, market participants turned to using oil tankers to store oil, which is typically more expensive than onshore storage. The drop in global oil demand and increased need for floating storage occurred at a time when global crude oil production (specifically from members of the Organization of the Petroleum Exporting Countries, or OPEC) and demand for crude oil tankers was high, driving up tanker rates. Tanker rates have declined significantly since peaking in March because crude oil production and demand are now more balanced (Figure 1). However, oil inventories in floating storage remain relatively high.

Figure 1. VLCC tanker rate from the Arabian Gulf to Japan

U.S. Energy Information Administration (EIA) data show that global supply outpaced global demand in January and February 2020, which resulted in an average inventory build of 4.0 million barrels per day (b/d) during those two months. EIA estimates that global consumption of liquid fuels averaged 96.9 million b/d in January and February. Efforts to mitigate COVID-19’s spread led to a collapse in global petroleum product demand, and global liquids consumption fell to 91.3 million b/d in March and then to 80.8 million b/d in April. Crude oil and petroleum liquids production remained high through April, particularly production in Saudi Arabia, where crude oil output rose to 11.6 million b/d in April. This output was the highest crude oil production in Saudi Arabia of any month recorded in EIA data going back to 1993. The high production coupled with a collapse in demand caused petroleum inventories to increase by an estimated 9.3 million b/d in March and 19.5 million b/d in April.

Onshore storage is typically less expensive than floating storage, and onshore storage capacity tends to fill first. As onshore storage facilities neared capacity, use of tankers for crude oil storage began to increase. This, coupled with an increase in crude oil production from Saudi Arabia, drove up tanker rates. Tanker rates for Very Large Crude Carriers (VLCCs) on the Arabian Gulf to Japan route, one of the key global tanker routes, spiked in mid-March 2020 and remained elevated through mid-May. Tanker rates in mid-March reached $54 per metric ton, up from $12 per metric ton at the beginning of the month. Except for the spike in tanker rates in 2019 resulting from U.S. sanctions on Chinese shipping firm COSCO (China Ocean Shipping Company), the price in mid-March 2020 was the highest since at least 2000.

The reduction in global demand for petroleum caused near-dated crude oil futures prices to fall faster than later-dated contracts and led to a strong contango market, when prices in the future are more than current prices (Figure 2). With futures market prices in contango, market participants can get higher prices further in the future than they can in the next month’s contract, which encourages participants to store crude oil and sell it at a later date. The strong contango in the March to May 2020 timeframe drove crude oil into storage and was strong enough to cover the costs of floating storage.

Figure 2. Brent crude oil futures price spreads for select months

The strong contango and weak demand drove global petroleum stocks up. EIA estimates that global liquids stocks (including crude oil and petroleum products) increased by an average of 14.3 million b/d in March and April. With the exception of inventory data for the United States, EIA does not collect data on global petroleum inventory levels; however, changes in global inventories published by EIA are implied based on the difference between estimates of world production and world consumption. Best data on inventories are available for countries in the Organization for Economic Cooperation and Development (OECD) and can indicate global trends. The International Energy Agency and EIA show that OECD inventories increased to 3.2 billion barrels in May 2020, the highest level since at least 2003.

A significant portion of the estimated global stock build was crude oil put into floating storage. Data from ClipperData indicate that global crude oil floating storage (defined here as a crude oil tanker that is within a designated storage zone for at least seven days, is anchored or drifting slowly, and is known to be loaded from a crude facility) increased from 65.9 million barrels on March 1, 2020, to 221.5 million barrels on July 9, 2020. In China alone, floating storage increased from 6.5 million barrels to 86.3 million barrels during the same period. Floating storage in China reached a recent high of 105.5 million barrels on August 29, 2020. As of October 13, global floating storage has fallen 19% from its recent high in July, and floating storage in China has fallen 41% from its recent high in August (Figure 3).

Figure 3. Global and China crude oil in floating storage

Trade press reports indicate that floating storage off China, however, increased in part because port congestion forced tankers to wait offshore before unloading rather than the contango price structure. Because of the rapid decline in near-term prices, market participants in China imported large volumes of crude oil, and trade press reports indicate that China’s crude oil stockpiles increased during this period. In June 2020, Chinese imports of crude oil reached 13.0 million b/d, the highest level since at least 2004 (Figure 4). The large amount of crude oil imports led to port congestion and forced oil tankers to linger offshore until they were able to unload their cargoes. The recent decline in floating storage may indicate that port congestion is decreasing as crude oil imports into China fall from their June high. Although decreasing, floating storage off China and around the world remains high. As of October 13, 2020, global floating storage is nearly 3 times higher than on March 1, and floating storage off China is nearly 10 times higher.

Figure 4. China crude oil imports by country (January 2018–August 2020)

As of mid-October 2020, the market remained in contango but to a much lesser degree than earlier in the year, decreasing the incentive to move crude oil into storage. In addition, trade press reports indicate that the recent contango levels may not be sufficient to drive additional barrels of crude into floating storage. Decreasing demand for tankers because of lower crude oil production and declining floating storage has driven tanker rates down.

In September 2020, tanker rates on the Arabian Gulf to Japan route fell to $5.50 per metric ton, the lowest rate since 2003. Production cuts from OPEC and partner countries (OPEC+) decreased the demand for crude oil shipping and floating storage, contributing to the low tanker rates. The most recent OPEC+ production cuts were implemented in May. EIA data indicates that from April to May, crude oil production in Saudi Arabia fell by 3.1 million b/d and that OPEC production fell by 6.0 million b/d. September estimates indicate OPEC crude oil production averaged 24.0 million b/d, down 6.3 million b/d from the annual high of 30.3 million b/d set in April.

Global consumption has recovered somewhat but remains lower than 2019 levels. EIA estimates that global consumption of liquid fuels averaged 95.3 million b/d in September 2020, up from the recent low of 80.8 million b/d in April 2020, but down 6.4 million b/d from September 2019. From May through September, global inventories have drawn at an average rate of 1.3 million b/d. In the October STEO, EIA forecast that global liquids consumption will average 92.8 million b/d in 2020, down 8.6 million b/d (8%) from 2019, and consumption in 2021 will average 99.1 million b/d, down 2.4 million b/d (2%) from 2019. Future demand for petroleum products remains highly uncertain as COVID-19 infection rates are rising in a number of countries. As long as weak global petroleum demand persists and production remains low, tanker rates are likely to remain low.

U.S. average regular gasoline and diesel prices decrease

The U.S. average regular gasoline retail price decreased nearly 2 cents to $2.15 per gallon on October 19, 49 cents lower than the same time last year. The Midwest price decreased more than 3 cents to $2.00 per gallon, the East Coast price decreased more than 1 cent to $2.12 per gallon, the Gulf Coast and West Coast prices each decreased nearly 1 cent to $1.83 per gallon and $2.79 per gallon, respectively, and the Rocky Mountain price decreased nearly 1 cent, remaining virtually unchanged at $2.26 per gallon.

The U.S. average diesel fuel price decreased nearly 1 cent to $2.39 per gallon on October 19, 66 cents lower than a year ago. The West Coast, Midwest, and Gulf Coast prices each decreased nearly 1 cent to $2.92 per gallon, $2.27 per gallon, and $2.14 per gallon, respectively, the East Coast price decreased nearly 1 cent, remaining virtually unchanged at $2.47 per gallon, and the Rocky Mountain price decreased less than 1 cent, remaining virtually unchanged at $2.33 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 1.6 million barrels last week to 98.3 million barrels as of October 16, 2020, 9.6 million barrels (10.8%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.8 million barrels, and Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged. Midwest and East Coast inventories each increased by 0.1 million barrels.

Residential heating fuel prices increase

As of October 19, 2020, residential heating oil prices averaged $2.15 per gallon, more than 1 cent per gallon above last week’s price but almost 82 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged nearly $1.28 per gallon, more than 1 cent per gallon below last week’s price and more than 77 cents per gallon lower than a year ago.

Residential propane prices averaged more than $1.79 per gallon, nearly 2 cents per gallon above last week’s price but nearly 5 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.69 per gallon, nearly 1 cent per gallon lower than last week’s price but 9 cents per gallon above last year’s price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Tags: China , consumption/demand , forecasts/projections , inventories/stocks , production/supply

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  10/19/20 Week Year
Gasoline 2.150 -0.017 -0.488
Diesel 2.388 -0.007 -0.662
Heating Oil 2.150 0.014 -0.816
Propane 1.792 0.015 -0.047

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  10/16/20 Week Year
Crude oil 40.88 0.28 -12.90
Gasoline 1.169 -0.034 -0.454
Heating oil 1.179 -0.014 -0.768
*Note: Crude oil price in dollars per barrel.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  10/16/20 Week Year
Crude oil 488.1 -1.0 55.0
Gasoline 227.0 1.9 3.9
Distillate 160.7 -3.8 39.9
Propane 98.325 -1.572 3.042