Power plants in Saudi Arabia burned an average 0.4 million barrels per day (b/d) of crude oil in 2018 directly for power generation, the lowest amount since at least 2009, the earliest year that data are available from the Joint Organizations Data Initiative (JODI, Figure 1). According to the JODI data, compared with all other countries, Saudi Arabia burns by far the largest amount of crude oil directly for power generation. Between 2015 and 2017, Iraq used the second-largest amount of crude oil for power generation (over 150,000 b/d on average), but has significantly reduced its direct crude burn since then.
During the summer months, Saudi Arabia typically experiences an increase in electricity consumption as domestic demand for air conditioning rises. Saudi Arabia relies on crude oil and other fossil fuels, such as petroleum products and natural gas, for power generation. Saudi Arabia’s direct crude burn reached a record high during the summer of 2015, averaging 0.9 million b/d from June to August. In comparison, direct crude burn in the summer of 2018 was 41% lower at 0.5 million b/d.
Despite continued, steady increases in both population and electricity consumption, Saudi Arabia managed to reduce its reliance on crude oil for power generation by increasing the use of other energy sources, such as natural gas and fuel oil. Most of the natural gas that Saudi Arabia produces is associated gas, which is natural gas produced along with crude oil from an oil well. In recent years, however, nonassociated natural gas production has increased. The Wasit gas plant reached its full operating capacity of 2.5 billion cubic feet per day (Bcf/d) in 2016. The plant was built to process nonassociated gas, which it is currently processing from the Hasbah and Arabiyah offshore gas fields, both of which began production in 2016. Saudi Arabia is investing in more natural gas processing capacity, including the construction of the Fadhili gas plant, which will be able to process nonassociated natural gas from both on- and offshore fields. The Fadhili gas plant is expected to be completed by the end of 2019 with a capacity of 2.5 Bcf/d. Consumption of natural gas in Saudi Arabia has steadily increased, averaging 10.6 Bcf/d in 2017, the latest year for which data are available (Figure 2).
In addition to natural gas, Saudi Arabia has also been using fuel oil as a partial replacement of crude oil in power generation. High-sulfur fuel oil is a relatively cheap petroleum product that can be used to fuel marine vessels and can also be used for power generation. However, because of environmental concerns and competition with other fuels, fuel oil consumption has been generally declining in most regions in the world. In Saudi Arabia, however, fuel oil consumption rose 25% between 2015 and 2018 to 0.5 million b/d on average, according to JODI data. Some trade press reports indicate that one potential side effect of the upcoming changes to the sulfur limits in marine fuels in 2020 is that the stranded high-sulfur fuel oil could be sent to Saudi Arabia to further replace crude oil in power generation.
With less crude oil directly being used for power generation, more crude oil is available for domestic refining and exports. For many years, Saudi Arabia has been working to increase its domestic refinery capacity. Saudi Arabia is able to process 2.9 million b/d of crude oil domestically, which will rise further after the startup of the 400,000-b/d Jazan refinery, which may come online in 2019. Because of its refinery additions, Saudi Arabia has been able to process more of its crude oil domestically. Crude oil refinery runs averaged roughly 1.8 million b/d in 2009 and subsequently rose to an average of 2.6 million b/d by 2018, according to JODI data (Figure 3).
As a result of increased refinery runs, Saudi Arabia was also able to increase the amount of petroleum products it could export. Exports of petroleum products more than quadrupled between 2009 and 2018, from 0.4 million b/d to 2.0 million b/d. Saudi Arabia exports more diesel than any other petroleum product, averaging 0.8 million b/d in 2018. Gasoline and fuel oil were the next two most exported petroleum products in 2018 at 0.4 million b/d and 0.3 million b/d, respectively. Saudi Arabia also imports petroleum products; however, over the past several years, Saudi Arabia has generally become a net exporter of most products, according to JODI data.
In addition to refining more crude oil domestically, using less crude oil in power generation can enable Saudi Arabia to increase crude oil exports, if needed. However, in late 2016 and in late 2018, Saudi Arabia, along with other members of the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC countries, agreed to voluntarily cut crude oil production in order to prevent further declines in crude oil prices. These agreements resulted in lower production of crude oil in Saudi Arabia, which is a more significant factor in how much crude oil the country has available to export throughout the year (Figure 4).
Furthermore, Saudi Arabia has been cutting production beyond its agreed-upon target, meaning that as Saudi Arabia’s crude oil production falls, production of associated natural gas will also decline. Declines in associated natural gas production could result in an increased need for crude oil used for power generation.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose nearly 5 cents from the previous week to $2.89 per gallon on April 29, 4 cents higher than the same time last year. The Rocky Mountain price rose over 8 cents to $2.84 per gallon, the East Coast and Gulf Coast prices both increased nearly 5 cents to $2.78 per gallon and $2.58 per gallon, respectively, and the Midwest and West Coast prices each rose over 4 cents to $2.77 per gallon and $3.67 per gallon, respectively.
The U.S. average diesel fuel price increased more than 2 cents to $3.17 per gallon on April 29, 1 cent higher than a year ago. The Rocky Mountain price increased 4 cents to $3.18 per gallon, the West Coast price increased more than 3 cents to $3.73 per gallon, the Gulf Coast and East Coast prices increased 2 cents to $2.94 per gallon and $ 3.19 per gallon, respectively, and the Midwest price increased nearly 2 cents to $3.06 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.2 million barrels last week to 58.9 million barrels as of April 26, 2019, 10.3 million barrels (21.1%) greater than the five-year (2014-2018) average inventory levels for this same time of year. Midwest, Rocky Mountain/West Coast, and East Coast inventories increased by 0.9 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively, and Gulf Coast inventories increased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 9.6% of total propane/propylene inventories.
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Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b
Headlines of the week
Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.
WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.
Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).
On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.
Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.
Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.
Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.
Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).
U.S. average regular gasoline and diesel prices fall
The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.
The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.
Residential heating fuel prices decrease
As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.
Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.
Headline crude prices for the week beginning 16 March 2020 – Brent: US$30/b; WTI: US$28/b
Headlines of the week