On April 27, 2020, the U.S. average regular retail gasoline price was $1.77 per gallon (gal), the lowest price since February 2016. On May 4, the U.S. average gasoline price increased slightly to $1.79/gal. The United States declared a national emergency on March 13 in response to concerns regarding spread of the 2019 novel coronavirus disease (COVID-19). From March 16 to May 4, the U.S. average regular retail gasoline price fell by $0.46/gal. The lower gasoline prices reflect low crude oil prices, low gasoline demand, and rising gasoline inventories.
As a result of reduced economic activity and stay-at-home orders aimed at slowing the spread of COVID-19, consumption of petroleum products and the price for crude oil (the primary input for producing gasoline) have both declined. The Brent crude oil price, which is generally more closely correlated than the West Texas Intermediate (WTI) price to the price of U.S. gasoline, settled at $18 per barrel (b) on May 1, down $15/b (45%) since March 13 and $53/b (74%) less than a year ago (Figure 1).
Falling crude oil prices have coincided with decreasing transportation fuel demand, placing further downward pressure on gasoline prices. U.S. gasoline consumption (as measured by the four-week rolling average of product supplied) fell from 9.3 million barrels per day (b/d) the week ending March 13 to 5.3 million b/d the week ending on April 24.
As consumption has decreased, gasoline inventories have risen to record levels despite refinery run cuts. On April 17, total U.S. gasoline inventories reached 263.2 million barrels, the highest level recorded since the U.S. Energy Information Administration (EIA) began collecting these data in 1990 (Figure 2). Gasoline inventories have since fallen slightly to 256.4 million barrels as of May 1. Although EIA does not collect weekly demand data on a regional basis, low refinery runs and high gasoline inventories indicate low demand in each region. As a result, gasoline prices have decreased in each region. In addition, the U.S. Environmental Protection Agency’s (EPA) temporary waiver of the requirement to switch to summer-grade gasoline is putting further downward pressure on gasoline prices.
From March 16 to May 4, the average regular retail price of gasoline in the West Coast (Petroleum Administration for Defense District, or PADD, 5) fell $0.58/gal to $2.44/gal, the lowest price since March 2016. The West Coast retail gasoline price is typically higher than the average U.S. price because of the region’s tight supply and demand balance, geographical isolation from other U.S. refining centers—such as the Gulf Coast (PADD 3)—because of very limited gasoline transportation infrastructure, and gasoline specifications that are more costly to manufacture. Although the May 4, 2020, West Coast gasoline price is $0.65/gal higher than the U.S. average, it is $1.27/gal less than West Coast gasoline price for the same time last year.
Total West Coast motor gasoline inventories increased by 5.0 million barrels from March 13 (when the national emergency was declared) to 35.0 million barrels on April 10, the largest inventory since 2013 (Figure 3). More recently, inventories have begun to decline, reflecting low refinery runs as gasoline inventories are drawn down. In the week ending May 1, weekly gross inputs into West Coast refineries fell to 1.7 million b/d, the least on record. The five weeks from April 3 through May 1 had the five lowest levels of West Coast refiner gross production of gasoline on record (going back to June 2010, when EIA began collecting these data). West Coast gasoline inventories have fallen during the past three weeks, but they are still higher than the previous five-year (2015–19) maximum.
Gasoline inventories in the U.S. Gulf Coast have also increased. From March 13 to May 1, Gulf Coast gasoline inventories increased by 6.8 million barrels (8%) to 89.5 million barrels. Because of refinery run cuts and decreasing refinery yields of gasoline, Gulf Coast refinery gross production of motor gasoline fell to 2.9 million b/d for the week of April 24, the lowest level on record since June 2010, when EIA began collecting these data. The week of May 1, Gulf Coast refinery gross production of motor gasoline increased slightly to 3.0 million b/d. The high inventory levels are putting downward pressure on the price of Gulf Coast gasoline, which fell to $1.49/gal on May 4, down $0.48/gal since March 16 and the lowest price since 2004. The Gulf Coast typically has the lowest retail gasoline price in the country because it has more than 50% of U.S. refining capacity and produces more gasoline than it consumes. However, the Midwest (PADD 2) had the country’s lowest gasoline price from March 30 to April 27 (Figure 4), reflecting lack of demand for gasoline in the region.
The price of motor gasoline in the Midwest was $1.57/gal as of May 4, down $0.46/gal since March 16. Midwest gasoline prices were lower than Gulf Coast prices for five consecutive weeks, the first time Midwest prices have remained lower than Gulf Coast prices for more than two consecutive weeks since December 2008. As Midwest inventories have begun to decline and Gulf Coast inventories continue to build, the Gulf Coast price has again fallen below the Midwest price.
The East Coast (PADD 1) and Rocky Mountain (PADD 4) regions have also seen falling gasoline prices. As of May 4, the East Coast price was $1.79/gal, down $0.40/gal since March 16. The Rocky Mountain price was $1.77/gal on May 4, down $0.55/gal since March 16. Like the rest of the country, both the East Coast and Rocky Mountain regions have experienced gasoline inventories higher than the previous five-year maximum.
U.S. average regular gasoline price rises, diesel price falls
The U.S. average regular gasoline retail price rose nearly 2 cents per gallon from the previous week to $1.79 per gallon on May 4, $1.11 lower than the same time last year. The Midwest price rose nearly 10 cents to $1.57 per gallon. The Rocky Mountain price fell nearly 4 cents to $1.77 per gallon, the East Coast price fell nearly 2 cents to $1.79 per gallon, the Gulf Coast price fell 2 cents to $1.49 per gallon, and the West Coast price fell more than 1 cent to $2.44 per gallon.
The U.S. average diesel fuel price fell nearly 4 cents to $2.40 per gallon on May 4, 77 cents lower than a year ago. The Rocky Mountain price fell more than 6 cents to $2.37 per gallon, the West Coast, East Coast, Midwest, and Gulf Coast prices each fell nearly 4 cents to $2.90 per gallon, $2.51 per gallon, $2.25 per gallon, and $2.17 per gallon, respectively.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 2.5 million barrels last week to 59.4 million barrels as of May 1, 2020, 7.5 million barrels (14.5%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories increased by 1.2 million barrels, Midwest inventories increased by 0.9 million barrels, and East Coast and Rocky Mountain/West Coast inventories each increased by 0.2 million barrels.
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Two acquisitions in the energy sector were announced in the last week that illustrate the growing divergence in approaching the future of oil and gas between Europe and the USA. In France, Total announced that it had bought Fonroche Biogaz, the market leader in the production of renewable gas in France. In North America, ConocoPhillips completed its acquisition of Concho Resources, deepening the upstream major’s foothold into the lucrative Permian Basin and its shale riches. One is heading towards renewables, and the other is doubling down on conventional oil and gas.
What does this say about the direction of the energy industry?
Total’s move is unsurprising. Like almost all of its European peers operating in the oil and gas sector, Total has announced ambitious targets to become carbon-neutral by 2050. It is an ambition supported by the European population and pushed for by European governments, so in that sense, Total is following the wishes of its investors and stakeholders – just like BP, Shell, Repsol, Eni and others are doing. Fonroche Biogaz is therefore a canny acquisition. The company designs, builds and operates anaerobic digestion units that convert organic waste such as farming manure into biomethane to serve a gas feedstock for power generation. Fonroche Biogaz already has close to 500 GWh of installed capacity through seven power generation units with four in the pipeline. This feeds into Total’s recent moves to expand its renewable power generation capacity, with the stated intention of increasing the group’s biomethane capacity to 1.5 terawatts per hour (TWh) by 2025. Through this, Total vaults into a leading position within the renewable gas market in Europe, which is already active through affiliates such as Méthanergy, PitPoint and Clean Energy.
In parallel to this move, Total also announced that it has decided not to renew its membership in the American Petroleum Institute for 2021. Citing that it is only ‘partially aligned’ with the API on climate change issues in the past, Total has now decided that those positions have now ‘diverged’ particularly on rolling back methane emission regulations, carbon pricing and decarbonising transport. The French supermajor is not alone in its stance. BP, which has ditched the supermajor moniker in favour of turning itself into a clean energy giant, has also expressed reservations over the API’s stance over climate issues, and may very well choose to resign from the trade group as well. Other European upstream players might follow suit.
However, the core of the API will remain American energy firms. And the stance among these companies remains pro-oil and gas, despite shareholder pressure to bring climate issues and clean energy to the forefront. While the likes of ExxonMobil and Chevron have balanced significant investments into prolific shale patches in North America with public overtures to embrace renewables, no major US firm has made a public commitment to a carbon-neutral future as their European counterparts have. And so ConocoPhillips acquisition of Concho Resources, which boosts its value to some US$60 billion is not an outlier, but a preview of the ongoing consolidation happening in US shale as the free-for-all days give way to big boy acquisitions following the price-upheaval there since 2019.
That could change. In fact, it will change. The incoming Biden administration marks a significant break from the Trump administration’s embrace of oil and gas. Instead of opening of protected federal lands to exploration, especially in Alaska and sensitive coastal areas and loosening environmental regulations, the US will now pivot to putting climate change at the top of the agenda. Although political realities may water it down, the progressive faction of the Democrats are pushing for a Green New Deal embracing sustainability as the future for the US. Biden has already hinted that he may cancel the controversial and long-running Keystone XL pipeline via executive order on his first day in the office. His nominees for key positions including the Department of the Interior, Department of Energy, Environmental Protection Agency and Council on Environmental Quality suggest that there will be a major push on low-carbon and renewable initiatives, at least for the next 4 years. A pledge to reach net zero fossil fuel emissions from the power sector by 2035 has been mooted. More will come.
The landscape is changing. But the two approaches still apply, the aggressive acceleration adopted by European majors, and the slower movement favoured by US firms. Political changes in the USA might hasten the change, but it is unlikely that convergence will happen anytime soon. There is room in the world for both approaches for now, but the future seems inevitable. It just depends on how energy companies want to get there.
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In its January Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global demand for petroleum liquids will be greater than global supply in 2021, especially during the first quarter, leading to inventory draws. As a result, EIA expects the price of Brent crude oil to increase from its December 2020 average of $50 per barrel (b) to an average of $56/b in the first quarter of 2021. The Brent price is then expected to average between $51/b and $54/b on a quarterly basis through 2022.
EIA expects that growth in crude oil production from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) will be limited because of a multilateral agreement to limit production. Saudi Arabia announced that it would voluntarily cut production by an additional 1.0 million b/d during February and March. Even with this cut, EIA expects OPEC to produce more oil than it did last year, forecasting that crude oil production from OPEC will average 27.2 million b/d in 2021, up from an estimated 25.6 million b/d in 2020.
EIA forecasts that U.S. crude oil production in the Lower 48 states—excluding the Gulf of Mexico—will decline in the first quarter of 2021 before increasing through the end of 2022. In 2021, EIA expects crude oil production in this region will average 8.9 million b/d and total U.S. crude oil production will average 11.1 million b/d, which is less than 2020 production.
EIA expects that responses to the recent rise in COVID-19 cases will continue to limit global oil demand in the first half of 2021. Based on global macroeconomic forecasts from Oxford Economics, however, EIA forecasts that global gross domestic product will grow by 5.4% in 2021 and by 4.3% in 2022, leading to energy consumption growth. EIA forecasts that global consumption of liquid fuels will average 97.8 million barrels per day (b/d) in 2021 and 101.1 million b/d in 2022, only slightly less than the 2019 average of 101.2 million b/d.
EIA expects global inventory draws will contribute to forecast rising crude oil prices in the first quarter of 2021. Despite rising forecast crude oil prices in early 2021, EIA expects upward price pressure will be limited through the forecast period because of high global oil inventory, surplus crude oil production capacity, and stock draws decreasing after the first quarter of 2021. EIA forecasts Brent crude oil prices will average $53/b in both 2021 and 2022.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)
You can find more information on EIA’s expectations for changes in global petroleum liquids production, consumption, and crude oil prices in EIA’s latest This Week in Petroleum article and its January STEO.