Many a situation, or event, is often referred to as “the elephant in the room.” Something that’s too big to ignore, but let’s ignore it anyway and hope that the elephant will go away.
There’s another phrase that seems appropriate in today’s crude oil and refined product markets, and that is “beware the sleeping giant.”
The giant that is about to awake is the price of crude, diesel, gasoline, and jet fuel; and this giant is waking up on the grumpy side of the supply and demand bed.
Simply put: supply is tight while demand is unravelling.
After some 16 months of consumers hiding in terror behind the COVID-19 curtain, the much maligned pharmaceutical industry has come to the rescue allowing consumers and manufacturing sectors to venture out into the harsh light of a renewed day, tippy toeing back to work and kick starting economies around the world.
The race back to normality has increased demand for all petroleum related products to the point that Wall Street futures traders are muttering about West Texas Intermediate (WTI) hitting $100/bbl by late Q-3 or early Q-4 this year.
The latest EIA data appears to support this crystal ball assumption. U.S. inventories of crude, gasolines, and distillates are all significantly below the 5-year average, while demand year over year is up from between 14% for gasoline to 98% for jet fuel.
Although these demand numbers are impressively scary, they relate to a time when the pandemic was in its early stages, when demand hit the panic button. Therefore these demand numbers may be a false positive.
But what isn’t false is that U.S. crude oil imports and shale oil production are also down so inputs to refineries are at an ebb tide.
At the supply end of the pipe, refinery utilization is at 92% on a national basis. The 2019 pre-pandemic rate was 94% so the refining industry has fully recovered and is ready to catch up with demand.
If WTI reaches $100/bbl what will that mean for gasoline and diesel prices? Crude at $100/bbl will increase today’s pump and rack and rack prices by $0.15/L.
This is not a sleeping giant we want to wake up to.
– Roger McKnight – B.Sc., Senior Petroleum Analyst
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