Transportation fuel demand has decreased since early March 2020 as a result of reduced economic activity and stay-at-home orders aimed at slowing the spread of the 2019 novel coronavirus disease (COVID-19). U.S. refineries have reduced the amount of crude oil and other inputs that they process (also known as refinery runs). U.S. refinery runs fell for four consecutive weeks, reaching 12.8 million barrels per day (b/d) in the week ending April 17, and increased slightly to 13.2 million b/d for the week ending April 24, or nearly 21% lower than the previous five-year average for this time of year.
Source: U.S. Energy Information Administration, Weekly Petroleum Status Report
From March 13 (when a national emergency was declared in the United States) to April 24, finished motor gasoline consumption (measured as product supplied) fell to 5.1 million b/d in the week ending April 3, the least product supplied recorded since the U.S. Energy Information Administration (EIA) began tracking these data in 1991. In the weeks since then, gasoline product supplied has risen to 5.9 million b/d, or about 37% lower than the previous five-year average for late April.
Jet fuel product supplied set a record low during the week of April 10, falling to 463,000 b/d. Jet fuel product supplied increased during the past two weeks, averaging 800,000 b/d for the week ending April 24, or 51% lower than the previous five-year average.
Initially, demand for distillate was not as affected as demand for motor gasoline and jet fuel. From March 13 to April 3, distillate fuel product supplied remained within the previous five-year range. Since April 3, however, distillate product supplied fell to its lowest level in 21 years of 2.8 million b/d for the week of April 10. Since then, distillate fuel product supplied has increased slightly and averaged 3.2 million b/d for the week ending April 24.
Distillate fuel oil is primarily consumed as diesel fuel, the predominant fuel of the trucking, locomotive, and agricultural sectors. Increased demand for home delivery and distribution of necessary goods and services has likely supported the distillate product supplied. Recent declines in broad economic activity may be reducing overall distillate demand, despite some support from trucking activity.
Source: U.S. Energy Information Administration, Weekly Petroleum Status Report
As refinery runs have fallen, refiners have also changed the mix of petroleum products they are producing. Normally (based on the 2019 average), a barrel of crude oil and other inputs will yield 51% motor gasoline, 31% distillate, and 11% jet fuel. U.S. refiners have recently decreased their production of motor gasoline and jet fuel and increased their production of distillate.
U.S. refiner production of motor gasoline fell from 7.9 million b/d for the week ending March 13 to 5.4 million b/d for the week ending April 24. Production of jet fuel fell from 1.6 million b/d to 601,000 b/d during the same period, but production of distillate fuel oil increased from 4.7 million b/d to 4.9 million b/d.
The ratio of distillate production divided by crude oil inputs, also known as the distillate yield, reached 40% for the week ending April 17, the highest percentage yield of distillate since at least 1990 when data on refinery inputs started being collected by EIA. Distillate yields fell slightly, to 39%, in the following week. Motor gasoline yields were at a record low of 43% in the week ending April 24.
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In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.
In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.
Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.
We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.
Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.
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The tizzy that OPEC+ threw the world into in early July has been settled, with a confirmed pathway forward to restore production for the rest of 2021 and an extension of the deal further into 2022. The lone holdout from the early July meetings – the UAE – appears to have been satisfied with the concessions offered, paving the way for the crude oil producer group to begin increasing its crude oil production in monthly increments from August onwards. However, this deal comes at another difficult time; where the market had been fretting about a shortage of oil a month ago due to resurgent demand, a new blast of Covid-19 infections driven by the delta variant threatens to upend the equation once again. And so Brent crude futures settled below US$70/b for the first time since late May even as the argument at OPEC+ appeared to be settled.
How the argument settled? Well, on the surface, Riyadh and Moscow capitulated to Abu Dhabi’s demands that its baseline quota be adjusted in order to extend the deal. But since that demand would result in all other members asking for a similar adjustment, Saudi Arabia and Russia worked in a rise for all, and in the process, awarded themselves the largest increases.
The net result of this won’t be that apparent in the short- and mid-term. The original proposal at the early July meetings, backed by OPEC+’s technical committee was to raise crude production collectively by 400,000 b/d per month from August through December. The resulting 2 mmb/d increase in crude oil, it was predicted, would still lag behind expected gains in consumption, but would be sufficient to keep prices steady around the US$70/b range, especially when factoring in production increases from non-OPEC+ countries. The longer term view was that the supply deal needed to be extended from its initial expiration in April 2022, since global recovery was still ‘fragile’ and the bloc needed to exercise some control over supply to prevent ‘wild market fluctuations’. All members agreed to this, but the UAE had a caveat – that the extension must be accompanied by a review of its ‘unfair’ baseline quota.
The fix to this issue that was engineered by OPEC+’s twin giants Saudi Arabia and Russia was to raise quotas for all members from May 2022 through to the new expiration date for the supply deal in September 2022. So the UAE will see its baseline quota, the number by which its output compliance is calculated, rise by 330,000 b/d to 3.5 mmb/d. That’s a 10% increase, which will assuage Abu Dhabi’s itchiness to put the expensive crude output infrastructure it has invested billions in since 2016 to good use. But while the UAE’s hike was greater than some others, Saudi Arabia and Russia took the opportunity to award themselves (at least in terms of absolute numbers) by raising their own quotas by 500,000 b/d to 11.5 mmb/d each.
On the surface, that seems academic. Saudi Arabia has only pumped that much oil on a handful of occasions, while Russia’s true capacity is pegged at some 10.4 mmb/d. But the additional generous headroom offered by these larger numbers means that Riyadh and Moscow will have more leeway to react to market fluctuations in 2022, which at this point remains murky. Because while there is consensus that more crude oil will be needed in 2022, there is no consensus on what that number should be. The US EIA is predicting that OPEC+ should be pumping an additional 4 million barrels collectively from June 2021 levels in order to meet demand in the first half of 2022. However, OPEC itself is looking at a figure of some 3 mmb/d, forecasting a period of relative weakness that could possibly require a brief tightening of quotas if the new delta-driven Covid surge erupts into another series of crippling lockdowns. The IEA forecast is aligned with OPEC’s, with an even more cautious bent.
But at some point with the supply pathway from August to December set in stone, although OPEC+ has been careful to say that it may continue to make adjustments to this as the market develops, the issues of headline quota numbers fades away, while compliance rises to prominence. Because the success of the OPEC+ deal was not just based on its huge scale, but also the willingness of its 23 members to comply to their quotas. And that compliance, which has been the source of major frustrations in the past, has been surprisingly high throughout the pandemic. Even in May 2021, the average OPEC+ compliance was 85%. Only a handful of countries – Malaysia, Bahrain, Mexico and Equatorial Guinea – were estimated to have exceeded their quotas, and even then not by much. But compliance is easier to achieve in an environment where demand is weak. You can’t pump what you can’t sell after all. But as crude balances rapidly shift from glut to gluttony, the imperative to maintain compliance dissipates.
For now, OPEC+ has managed to placate the market with its ability to corral its members together to set some certainty for the immediate future of crude. Brent crude prices have now been restored above US$70/b, with WTI also climbing. The spat between Saudi Arabia and the UAE may have surprised and shocked market observers, but there is still unity in the club. However, that unity is set to be tested. By the end of 2021, the focus of the OPEC+ supply deal will have shifted from theoretical quotas to actual compliance. Abu Dhabi has managed to lift the tide for all OPEC+ members, offering them more room to manoeuvre in a recovering market, but discipline will not be uniform. And that’s when the fireworks will really begin.
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