After a four-week build-up in gasoline stocks, data reported by the Energy Information Administration of the United States shows a change in the trend, with a withdrawal of 3.7 million barrels (mmbbls) of gasoline from the stocks in one week and an increase of 568,000 barrels per day (mbd) in production of gasoline in the US refining system.

However, crude oil stocks continue to build as operable capacity at refineries remains below 70% and domestic oil production and net imports of crude have not decreased in the same proportion. USL48 operators have significantly cut capital expenditure (CapEx) and idled rigs but production has not declined as quickly as refining crude intake. For the remaining of 2020, rigs will not react to price increases unless the crude price goes permanently above $40 per barrel.

In particular crude oil stocks in Cushing, Oklahoma, US, are now at 81% of their working capacity. Considering the average weekly addition of the last five weeks at 4.8 mmbbls, the full storage capacity in Cushing will be reached by mid-May. Early last week, traders operating to close long positions of West Texas Intermediate (WTI) May future contracts faced negative prices when selling their positions. Not being able to close the position would have meant physical delivery in Cushing where most of the remaining storage is already contracted, and as a result, getting rid of the long position meant accepting even negative prices.

Although several US states have started re-activating economic activity, there is yet no certainty on the speed and sustainability of the gasoline demand rebound. Although crude prices are at significantly low levels, refineries will require also signalling via higher gasoline prices for production of gasoline to increase again at favourable processing economics.

Jet fuel has also suffered a drastic drop of more than 40% in its demand due to the stay-at-home orders and air travel limitations. However, distillate fuel oil has experienced in general a less severe drop in its demand mainly due to factories and diesel engines of trucks still being operational under the stay-at-home mandate.

The crude oil supply-demand system of the US relies on refinery’s crude intakes for both domestic and imported crude. As refineries clearly reduced their operating capacity at the end of March, crude stocks started to build capturing the excess of crude supply in the US.

In particular, crude production and net crude imports have not decreased as much and as quickly as the reduction in refining inputs. Also as storage faces a limited capacity, WTI prices have incorporated this information in the form of additional discounts. Given the low-level prices for spot WTI, as well as for prompt months in the futures curve, it is likely that crude oil production in the US is reduced further as USL48 operators are not able to cover the ongoing expenditure for drilling new wells and operating existing wells profitably.

Figure 1 – Crude storage balances a tight supply-demand system

Source: US Energy Information Administration and GlobalData

In our base case scenario, crude production will be reduced by approximately 1.3 mmbd during the period of early March to end of June. This is mainly the result of a steep decline in the number of new wells drilled and also production being shut in several producing areas of the US. Our low case scenario assumes a larger drop in the number of new wells, which, in turn, creates a steeper drop in the total 2020 crude production from May to December of 2.4 mmbd.

Rigs will continue to be more reactive to downward price movements and for a sustained activity rebound to occur prices will need to be perceived as stabilised at a higher level of no less than $40 per barrel. In general crude oil production in the USL48 is still oversupplying and not fully adjusted to the lower crude demand in refineries. Unless gasoline demand starts to steadily pick up, crude oil storage will continue to build approaching full capacity by end of June, bringing down WTI spot prices month over month with respect to the WTI future curve.